Closing Stock Market SummaryThe S&P 500 increased 0.4% on Thursday, overcoming a 0.7% intraday decline on no specific news catalysts. The Nasdaq Composite (+0.1%) and Dow Jones Industrial Average (+0.3%) also recouped intraday losses while the Russell 2000 (-0.4%) still closed lower despite a recovery effort.
Two early headwinds for the market included technical resistance at the S&P 500's 200-day moving average (4492) and upwards pressure in long-term interest rates. The 10-yr yield settled higher by five basis points to 2.66% after trading at 2.56% overnight.
Investors, also cognizant of a hawkish-minded Fed, continued to lean defensively as the market drifted lower throughout the morning. Equities, however, turned around in the afternoon without a news catalyst, perhaps amid a contrarian mindset as sentiment had gotten too bearish.
The S&P 500 reclaimed its 200-day moving average on a closing basis with the help of seven of its 11 sectors. The health care (+1.9%), energy (+1.4%), and consumer staples (+1.2%) sectors led the advance with gains over 1.0%.
Conversely, the real estate (-0.9%), communication services (-0.7%), utilities (-0.3%), and financials (-0.1%) sectors closed lower. The CBOE Volatility Index (21.55, -0.55, -2.5%) did, too, as hedging interest waned amid the rebound-minded action.
In corporate news, shares of Costco (COST 608.05, +23.26, +4.0%) hit an all-time high after the company reported adjusted March comparable sales growth of 12.2% while HP Inc. (HPQ 40.06, +5.15, +14.8%) surged 15% after Warren Buffett's Berkshire Hathaway (BRK.B 346.51, +1.80, +0.5%) disclosed a stake in the company.
Back in the Treasury market, the 2s10s spread increased to 19 basis points from 12 basis points yesterday. The 2-yr yield decreased two basis points to 2.47% while the 10-yr yield, as noted above, settled at 2.66%. The U.S. Dollar Index increased 0.2% to 99.79. WTI crude futures fell 0.3%, or $0.29, to $96.30/bbl.
Reviewing Thursday's economic data:
- Initial claims for the week ending April 2 dropped by 5,000 to 166,000 ( consensus 200,000). Continuing claims for the week ending March 26 increased by 17,000 to 1.523 million.
- The key takeaway from the report is that it was influenced by revisions to seasonal adjustment factors. Still, the low level of initial claims following the revisions remains indicative of a tight labor market.
- Consumer credit increased by $41.8 billion in February ( consensus $15.5 billion). The prior month saw an upward revision to $8.9 bln from $6.8 bln.
- In February, consumer credit increased at a seasonally adjusted annual rate of 11.3%. Revolving credit increased at an annual rate of 20.7%, while nonrevolving credit increased at an annual rate of 8.4%.
Looking ahead, investors will receive the Wholesale Inventories report for February on Friday.
- Dow Jones Industrial Average -4.8% YTD
- S&P 500 -5.6% YTD
- Russell 2000 -10.5% YTD
- Nasdaq Composite -11.2% YTD
UK’s new energy security strategy branded ‘missed opportunity’
Document backs nuclear and offshore wind over cheaper land-based turbines or home improvements
Industry groups and academics have branded Boris Johnson’s long-awaited energy security strategy a “missed opportunity” that would not reduce the UK’s reliance on expensive imports in the short term and fail to alleviate the financial pressure on households from soaring fuel bills.
The prime minister put offshore wind and nuclear power at the centre of the policy that aims to produce 95 per cent of electricity from low-carbon sources by 2030 and reduce the country’s vulnerability to highly volatile global commodity markets.
Johnson said that by making nuclear power one of the cornerstones of the strategy it would allow Britain, which gave the world the first commercial atomic plant, to regain its “pre-eminence” in the technology.
The strategy was drawn up in response to the invasion of Ukraine by Russia, one of the world’s largest fossil fuel exporters. The decision by Vladimir Putin, Russia’s president, to go to war added further volatility to already high global commodity prices and prompted countries across Europe to revisit their energy strategies.
But the prime minister’s decision to back nuclear and offshore wind, which both have long lead times, over cheaper technologies, such as land-based turbines that are quicker to install, was widely criticised.
Energy groups and specialists were also dismayed at a lack of fresh funding to improve the energy efficiency of the UK’s housing stock, which ranks among the worst in Europe. Measures such as improved insulation were among the quickest ways of tackling the current energy crisis, they said.
Simon Virley, head of energy and natural resources at advisory firm KPMG, called the plan a “missed opportunity”. He added: “The best way to reduce energy bills permanently, cut emissions and reduce our dependence on imported gas is a step change in energy efficiency.”
He said that other European countries, like Holland, France and Germany, were “doing this as a matter of urgency as part of their response to the Russia-Ukraine crisis. Yet the UK strategy is almost silent on measures to improve energy efficiency”.
Danny Newport, head of net zero at the non-profit Tony Blair Institute, said the strategy felt “perilously insecure”. He said by “spurning onshore wind”, the government had prioritised “nimbyism” although he acknowledged there were never going to be any quick fixes to the challenge of increasing domestic energy supplies.
Michael Lewis, UK chief executive of Eon, Britain’s second-biggest energy company, said there was “little” in the strategy that would “deliver a solution this decade, let alone this year”.
Environment groups also criticised the government’s plan to hold the first UK North Sea licensing round since 2020 later this year. But Johnson defended plans to source more fossils fuels domestically, pointing out it fitted in with the UK’s net zero target. “In meeting net zero by 2050 we may still use a quarter of the gas that we use now,” he said.
The strategy sets out to reverse the decline in the UK’s nuclear generation capacity by setting a goal of building 24 gigawatts of new atomic power by 2050 — the equivalent of eight large atomic energy plants.
Britain has a poor recent record on delivering such projects, which can take over a decade to build. So far one new nuclear plant — the 3.2GW Hinkley Point C in Somerset — is under construction, even though the Labour government in 2006 set out plans for a new generation of reactors.
Offshore wind capacity is set to increase fivefold to 50GW by 2030, up from a previous 40GW goal by the end of the decade. This target was accompanied by a commitment to cut the time that offshore wind projects can take to start generating from 13 years “down by over half” by fast-tracking processes such as planning consent.
Business secretary Kwasi Kwarteng had wanted to include a target to double onshore wind capacity to 30GW by 2030 but government officials admitted that had not survived “political testing” to make it to the final strategy document.
The prime minister had come under heavy pressure from Conservative backbench MPs who oppose onshore wind, even though some of the government’s own polling shows the majority of the general public supports the technology.
The strategy stopped short of setting a firm target for solar power, another source that can be built quickly and relatively cheaply, but said it would look to increase the UK’s 14GW of capacity “up to five times by 2035”.
In the foreword to the document, the prime minister admitted that the benefits to consumers of the policies would not be felt for a long time, a point reinforced by Kwarteng who said the strategy would not yield results for at least three to five years and represented “more of a medium [-term solution]”.
Ed Miliband, Labour’s energy spokesperson, called the strategy “hopeless” and said the government was in “disarray” over the current cost of living crisis.
But the Climate Change Committee, an advisory group to the government, praised the strategy’s targets for offshore wind, nuclear and hydrogen — the latter of which was doubled to 10GW by 2030.
Mike Thompson, director of analysis at the CCC, said it was nevertheless disappointing “not to see more on energy efficiency and on supporting households to make changes that can cut their energy bills now”.
As part of its commitments on nuclear, the strategy confirmed the creation of a new task force, the “Great British Nuclear Vehicle”, to oversee projects and help build a “resilient” pipeline.
The strategy confirmed the government would look at “supporting” new nuclear projects, implying it would look at taking stakes in future nuclear power plants.
Lebanon reaches preliminary $3bn deal with IMF
Agreement marks first big step in tackling crippling economic crisis but full approval depends on reform package
Lebanon and the IMF have reached a preliminary agreement for a $3bn loan facility, the first significant step towards bringing relief from an economic and financial crisis that has crippled the country since 2019.
Two years after the onset of the crisis, the country’s currency has lost more than 90 per cent of its value and nearly three-quarters of its people live below the poverty line, according to the UN.
The long hoped-for bailout, announced on Thursday, is vital to stem the further collapse of the economy, but talks between the IMF and Lebanese authorities had repeatedly stalled over economic reforms required by donors.
“The [Extended Fund Arrangement] aims to support the authorities’ reform strategy to restore growth and financial sustainability, strengthen governance and transparency, and increase social and reconstruction spending,” the IMF said in a statement on Thursday.
Unveiling the deal following a meeting with IMF delegates in Beirut, Najib Mikati, Lebanon’s prime minister, said his government had promised the fund that it would implement wide-ranging reforms.
The crisis demanded “a comprehensive reform program” in order to achieve “financial and economic stability and . . . permanent and strong growth”, he said.
In its statement the IMF said: “This crisis is a manifestation of deep and persistent vulnerabilities generated by many years of unsustainable macroeconomic policies fuelling large twin deficits (fiscal and external), support for an overvalued exchange rate and an oversized financial sector, combined with severe accountability and transparency problems and lack of structural reforms.”
The fund arrangement would extend over 46 months and give Lebanon access to the equivalent of $3bn in special drawing rights. Full approval by the IMF board is contingent on Lebanon implementing a series of measures.
These include a restructuring strategy for the banking sector that limits the impact on small depositors and “recourse to public resources”; parliamentary approval of a bank restructuring law; and external evaluation of the 14 largest banks by a “reputable international firm”.
The agreement also requires reform of a decades-old banking secrecy law “to bring it in line with international standards to fight corruption”; completion of an audit of the central bank; parliamentary approval of the 2022 budget; and unification of the multiple official and black market exchange rates for the Lebanese pound that have existed since the crisis started.
The announcement is the first indication that Lebanon’s government is taking seriously the need to tackle the crisis, observers say. It also comes weeks before the country is due to hold a general election.
But given the Lebanese political establishment’s previous reluctance to implement reforms, the road to full approval by the IMF looked arduous, analysts warned.
Several PE firms reportedly considering bid for Scout24 - M&A blog - Potential bidders include H&F, EQT, and Permira - Source TradeTheNews.com
Crypto-Like Digital Dollar at Least Several Years Away, Yellen Says
Treasury secretary talks about methods to speed payments in the U.S.
WASHINGTON—Treasury Secretary Janet Yellen said the design and development of a digital dollar would likely take years if the U.S. chose to create one, while outlining the various questions the Biden administration is weighing as it considers ways to make payments faster in the U.S.
As part of President Biden’s executive order on cryptocurrency, the administration is studying the possibility of issuing a central-bank digital currency, following up on efforts at the Federal Reserve. Other countries including China have created a central-bank digital currency, or CBDC, as they try to keep up with the rise of cryptocurrencies.
In a speech at American University in Washington on Thursday, Ms. Yellen said the administration’s efforts would consider the impact of a CBDC on monetary policy, national security and international trade, as well as its utility for consumers. Whether Congress would need to authorize the creation of a digital dollar is also an element of the executive order.
“I can’t tell you yet what conclusions we will reach, but we must be clear that issuing a CBDC would likely present a major design and engineering challenge that would require years of development, not months,” Ms. Yellen, a former Fed chairwoman, said.
Ms. Yellen said the U.S. needs to make payment systems cheaper, faster and more accessible, noting the current system can push low-income Americans toward high-interest lenders to cover expenses as they wait for paychecks to clear.
A digital dollar could help Americans more easily send and receive money, she said, but more near-term changes could also make a difference.
She pointed to the coming creation of FedNow, a system that will allow bill payments, paychecks and other common consumer or business transfers to be available instantly and round-the-clock. FedNow, which is scheduled to be rolled out in 2023, is a change from the current system that is closed on weekends and can require days to settle a transaction.
“For many Americans, most transactions still take too long to settle,” Ms. Yellen said.
During her speech, Ms. Yellen reiterated many of the Biden administration’s broader goals for regulating digital assets and cryptocurrencies. She said that policy makers should approach the industry with a tech-neutral approach, crafting new policies based on how to best protect against risk, rather than necessarily targeting new forms of technology.
“Wherever possible, regulations should be tech neutral. For example, consumers, investors and businesses should be protected from fraud and misleading statements regardless of whether assets are stored on a balance sheet or they’re stored on a distributed ledger,” she said.
Many of the studies commissioned by the executive order on cryptocurrencies will take months, and meanwhile the Biden administration is pushing Congress to pass legislation more closely regulating stablecoins, a type of digital currency whose value is often pegged to the dollar.
The cryptocurrency industry has stepped up lobbying efforts in Washington, including hiring former top officials from Democratic and Republican administrations, in an effort to shape laws and regulators in their sector. Cryptocurrency values jumped last month after President Biden signed the executive order, a sign the industry welcomed the administration’s methodical approach to considering federal rules.
Bretton Woods III? China Begins Buying Russian Coal And Oil In Yuan
The old economic order, in which the dollar's centrality to global trade remains king, is beginning to fade. The latest example of the dollar's demise comes as China purchases coal and oil from Russia in yuan due to Western sanctions isolating Russian banks from the SWIFT payment system.
Chinese commodity firms purchased Russian coal in local currency in March, and the first shipments are expected to arrive in China this month, according to Bloomberg, citing Chinese consultancy Fenwei Energy Information Service Co. Traders said this coal shipment paid in yuan would be the first since the U.S. and Europe unleashed harsh sanctions severing some top Russian banks from SWIFT.
Traders are also reporting Russian crude bought in yuan. The first Eastern Siberia Pacific Ocean grade crude shipment will arrive at Chinese refiners in May.
Russia and China trading yuan for commodities is just one example of a new emerging economic order.
Premium subs should recall former N.Y. Fed repo guru and current Credit Suisse strategist Zoltan Pozsar's stunning note last week that said the consequences of the Ukraine war are ushering in "the birth of the Bretton Woods III - a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the west."
Fast forwarding to the punchline, Poszar wrote that if the framework he has laid out previously (and again, in his latest note) is the right framework to think about how to trade interest rates in coming years, inflation will be higher; the level of rates will be higher too; demand for commodity reserves will be higher, which will naturally replace demand for FX reserves (Treasuries and other G7 claims); Meanwhile, demand for dollars will be lower too as more trade will be done in other currencies; and as a result of this, the perennially negative cross-currency basis (the dollar premium) will naturally fade away and potentially become a positive cross-currency basis.Translation: the dollar is on its way out as the world's undisputed reserve currency, a consequences of events that put in motion when Putin invaded Ukraine (with the implicit blessing of China and India) and when the West decided to expel Russia from the entire western financial system.
It is this chain of events that Pozsar calls Bretton Woods III and the reports of China's purchases of oil and coal in yuan (not dollars) suggesting the path to that new world order is accelerating faster that many hoped (as the surge in the Ruble may also suggest).
Pozsar spoke with Bloomberg's Joe Weisenthal and Tracy Alloway this week and recited his Bretton Woods III thesis, suggesting:
"Instead of a Volcker moment, we got a Putin moment and we basically have war and out of this war, something will also emerge."Out of this, I think this 'Bretton Woods III' that I started to kind of develop and run with, is a world where we are, again, going to go back to commodity-backed money — where gold, once again, is going to play a big role. And not just gold, but I think all forms of commodities," Pozsar said.
To the Credit Suisse strategist's point, the global financial system's plumbing is being reworked, and the dollar's dominance in global trade is being challenged.
As Pepe Escobar recently noted, Iran has shown how to do it.
Persian Gulf traders confirmed to The Cradle that Iran is selling no less than 3 million barrels of oil a day even now, with no signed JCPOA (Joint Comprehensive Plan of Action agreement, currently under negotiation in Vienna). Oil is relabeled, smuggled, and transferred from tankers in the dead of night.All the blather about “crashing Russian markets,” ending foreign investment, destroying the ruble, a “full trade embargo,” expelling Russia from “the community of nations,” and so forth –that’s for the zombified galleries. Iran has been dealing with the same thing for four decades, and survived.
Moscow is also considering a rupee-ruble payment system for Indian oil traders, while Saudi Arabia could start pricing some of its brent in yuan for Chinese traders.
“The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency,” said economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security who co-wrote a book about de-dollarization.“If that block is taken out of the wall, the wall will begin to collapse.”
A drop in the demand for dollars would be bad news for a US government that depends on dollar demand to fund its out-of-control spending. As Michael Maharrey recently wrote, imagine a world in which the Chinese didn’t need dollars.
China ranks as the biggest foreign holder of US debt. If it continues to divest itself of dollars, who will pick up the slack? The Federal Reserve has been buying Treasuries hand over fist for the last two years, keeping its big fat thumb on the bond market. But it’s tapering purchases and supposedly planning on shrinking its balance sheet. If global demand for Treasuries drop precipitously — and it would in a world without the petrodollar — the US government would either have to drastically cut spending or the Fed would have to continue printing money to monetize the debt.
Even if this is nothing but talk, it underscores the fact that the dollar is on shaky ground. US policymakers would be wise to consider future dollar weaponization carefully.
Bonds Becoming A Texas Hedge For Stocks
Recent days have seen a phenomenon anathema to asset managers -- stocks and bonds both falling together. Unfortunately, this is something we’ll have to get more used to.
The most recent bond-and-stock flop was prompted by Fed Governor Lael Brainard’s hawkish comments on Tuesday, but it is something becoming increasingly common. Over 20% of days over the last year saw lower stocks and lower bonds, with this percentage rising quickly since the pandemic.
The most recent bond-and-stock flop was prompted by Fed Governor Lael Brainard’s hawkish comments on Tuesday, but it is something becoming increasingly common. Over 20% of days over the last year saw lower stocks and lower bonds, with this percentage rising quickly since the pandemic.
Sure, the percentage of days where both stocks and bonds have both gone up has also increased, but not to the same extent and, anyway, asset managers don’t lose much sleep when their holdings rise. The negative correlation between stocks and bonds that is a built-in axiom to the asset-management industry and the cornerstone of 60/40 portfolio construction is a historical anomaly. Only about 30% of the last 100 years has had a negative stock-bond correlation, with the bulk of that period occurring since the millennium.
Rising inflation and concomitantly rising yields are pushing the stock-bond correlation higher. Currently, it sits at about zero, but looking historically we can see that higher yields are generally consistent with a continued rise in the correlation.
Rising inflation and concomitantly rising yields are pushing the stock-bond correlation higher. Currently, it sits at about zero, but looking historically we can see that higher yields are generally consistent with a continued rise in the correlation.
This makes life difficult for holders of portfolios with stocks hedged with bonds. That was certainly the case in the high-inflation 1970s. While a portfolio of 60/40 stocks and bonds apparently did well, nominal variables become misleading in high-inflation periods and everything needs to be viewed in real terms. A 60/40 portfolio made almost 50% in the 1970s in nominal terms, but in real terms it actually lost almost 30%!
With bonds increasingly becoming a Texas Hedge, what are holders of 60/40-like portfolios to do?
Well, there are no great alternatives to government bonds as a hedge for stocks. Corporate bonds have an even greater correlation to stocks than government debt, so they are not particularly suitable. Commodities’ correlation with equities has fallen, but as a market it has considerably less depth and size than sovereign debt. Gold has a similar problem. Buying downside protection on stocks helps, but this does not provide a smooth return profile.
Which leads asset managers back to TINA - There Is No Alternative - loading up on more equities and hoping for the best. It is not destined to end well.
Well, there are no great alternatives to government bonds as a hedge for stocks. Corporate bonds have an even greater correlation to stocks than government debt, so they are not particularly suitable. Commodities’ correlation with equities has fallen, but as a market it has considerably less depth and size than sovereign debt. Gold has a similar problem. Buying downside protection on stocks helps, but this does not provide a smooth return profile.
Which leads asset managers back to TINA - There Is No Alternative - loading up on more equities and hoping for the best. It is not destined to end well.
Reportedly traders are worried that zinc prices could see volatility similar to nickel after commodity trader Trafigura has moved to take large quantities of zinc from LME registered warehouses in Asia - press
- Trafigura declines to comment on the report
New divorce rules may take some of the sting out of a split
Be prepared for some difficult conversations over your finances
The introduction of “no-fault” divorce in England and Wales this week is likely to make the legal process easier for some couples by reducing animosity. That does not mean emotional blame is no longer apportioned. Divorce is rarely easy and the biggest challenge is often splitting assets fairly. The new legislation does little to change the mechanics of that process, but it might help to make difficult conversations less fraught.
Once you have agreed to part ways, it is worth trying to begin adjusting to your new financial realities as soon as possible. If you have been dependent on your partner, either for money or to make major financial decisions, this can be scary. Taking time to review your own financial objectives is an important early step.
A key part of this process is understanding what those objectives look like, including where you want to — or can afford to — live and how much you can spend. Look at your household and individual expenditure and how that may change.
Take time bringing yourself up to speed on financial terms. It is not uncommon for one partner to oversee finances for the duration of the marriage, meaning the other might be at a disadvantage when it is time to look at the balance sheet. Even if both spouses are financially literate, you might not fully understand the value of more esoteric investments. An understanding of the basics can help you to appreciate what would be fair to walk away with — and what you are happy to leave behind.
It is natural to want to jump straight to the “who gets what” question. But before you can begin dividing assets, you need to understand what those assets actually are, how much risk they carry, how flexible they are, how they are taxed and how easily they can be accessed.
Unfortunately, dividing wealth is never as neat as splitting a chunk of money in half. For many assets, value can be subjective — and volatile. If you own a business, whether individually or jointly, how do you value it? What if it is an early-stage investment with a low relatively value, but forecast to do well in five or 10 years? Are you placing an emotional value on an asset as well as a financial value?
Consider illiquidity issues. How easily can you sell certain holdings? And for how much? An example I regularly see are enterprise investment scheme holdings that have been passed on. These are not easily sold and some will fail before that happens. You can understand the frustrations if these investments later have to be written down to zero and the partner who took them on had not understood the risk involved.
Ensure all pensions are on the table, even the smaller, forgotten pots from jobs many years ago. What position are the pensions currently in? Has any tax-free cash already been taken, are there any restrictions on the pension or benefits built into them? Do not overlook state pensions; if you have not built up the necessary credits to be eligible for the state pension, this should be considered. If your spouse has made those contributions, they could be looking at about an extra £10,000 a year secure income in retirement.
Tax implications will differ between various assets. There are time constraints for assets to be transferred tax efficiently so as not to trigger capital gains tax, and that potential liability is usually passed to the receiving party. Make sure you know the tax considerations of the assets you are taking on when agreeing to the settlement.
Your relationship with your spouse might be amicable now, but you cannot predict how friendly it will be in the future. Include in your settlement an agreement on potential future financial obligations, to avoid further acrimony or disagreements.
Most often, these obligations concern children. Although immediate educational costs will usually be taken into account, what about discussions on future promises of help to get on the property ladder? Consider how you will meet these obligations. You might need to take them into account in the process or reset your children’s expectations.
A financial planner can play a valuable role in your divorce process, working alongside your solicitor early on and during the negotiations on the financial split of assets to ensure a fair outcome, helping you understand the details and implications of decisions. And they can help you plan for your new future — showing you what you can afford, and not.
There may be many difficult discussions ahead. If the new legislation removes just a little of the friction from these discussions, it is to be welcomed.