Closing Market Summary: Wall Street Gets Fourth Straight Win; Financials Lag
The market climbed for a fourth straight session on Tuesday, with the S&P 500 and the Dow adding 0.4% and 0.6%, respectively. The tech-heavy Nasdaq lagged, but still managed to eke out a narrow victory, and the small-cap Russell 2000 ended lower by 0.5% despite hitting a new intraday record in early trading.
10 of 11 sectors finished Tuesday in the green. Defensive groups, including consumer staples (+1.3%), utilities (+1.0%), and telecom services (+1.1%) led the charge after lagging on Monday. The energy (+0.7%) and materials (+0.8%) groups were also strong, but the heavily-weighted financial space (-0.4%) struggled following Monday's rally.
Financials' decline helped to keep the broader market in check, as did a mild performance from the top-weighted tech space (+0.2%) and losses in both transport and biotech stocks; the Dow Jones Transportation Average declined 0.3%, and the iShares Nasdaq Biotechnology ETF (IBB 116.61, -0.20) slipped 0.2%.
Biogen (BIIB 344.82, -9.18) paced the biotech retreat with a loss of 2.6% after Robert W. Baird downgraded the stock, arguing that last week's upbeat reaction to positive Alzheimer's drug data was overblown. Still, the heavily-weighted health care sector finished with a gain of 0.4%.
In earnings news, PepsiCo (PEP 112.89, +5.13) rallied 4.8%, hitting a four-month high, after reporting better-than-expected earnings for the second quarter.
Elsewhere, Treasuries finished flat to slightly lower, pushing yields a tick higher; the benchmark 10-yr yield, for instance, climbed to 2.87% from 2.86%. WTI crude futures were up more than 1.0% in early trading, but finished higher by just 0.3% at $74.12/bbl, and the CBOE Volatility Index declined 1.3% to 12.53, a three-week low.
President Trump left for Brussels on Tuesday morning for a two-day NATO summit, during which he'll likely push allies to ramp up their military spending. Mr. Trump will travel to Britain following the NATO meeting and then to Finland for a highly-anticipated meeting with Russian president Vladimir Putin.
Reviewing Tuesday's economic data, which included the Job Openings and Labor Turnover Survey for May and the NFIB Small Business Optimism Index for June:
- The May Job Openings and Labor Turnover Survey showed that job openings increased to 6.638 million from a revised 6.840 million (from 6.698 million) in April.
- The NFIB Small Business Optimism Index for June ticked down to 107.2 from 107.8 in the prior reading.
Looking ahead, investors will receive on Wednesday the June Producer Price Index, May Wholesale Inventories, and the weekly MBA Mortgage Applications Index.
- Nasdaq Composite +12.4% YTD
- Russell 2000 +10.4% YTD
- S&P 500 +4.5% YTD
- Dow Jones Industrial Average +0.8% YTD
Deutsche Bank: costly advice
What tips can Cerberus offer the board on restructuring that it has not already heard?
Deutsche Bank pays its executives handsomely. While long-suffering shareholders wait in vain for a recovery, executives have squirrelled away fortunes. Having paid everyone else, the German bank is now putting an investor on the payroll. One of the bank’s largest shareholders, US-based fund Cerberus, will offer advice on restructuring operations. Paying an investor to become a consultant looks strange even if Deutsche is an institution in need of radical ideas.
Pay and productivity need to be high on Cerberus’s to-do list. The bank pays out a lot, and produces little for shareholders. More than 700 high earners last year were paid a weighted average of €1.9m per year.
Yet over the past 12 months, the bank’s share price has dropped 40 per cent — almost double the pace of German rival Commerzbank. Deutsche’s regional peer group hardly deserves much praise, but the MSCI Europe Banks index is down only 9 per cent over the same period.
Matt Zames, newly installed president of Cerberus, is as well placed as anyone to assist the ailing bank. He arrives fresh from spending five years as chief operating officer at JPMorgan Chase, one of the better run US financial institutions.
The question is, what advice can he provide Deutsche’s board that it has not already heard? Bring in more talent? Check. Cut costs and raise capital? Fine. Be honest with staff and shareholders about slashing more costs? Done.
Cerberus will also need to reassure other shareholders, and regulators, that it cannot act on any insider knowledge. It states that it will not buy or sell shares during the consultancy. But without extending this commitment beyond the engagement, the risk of insider trading remains. Regulatory oversight will be key.
And it may not even be worth the effort. Adding one more name to the payroll will not solve Deutsche’s problems.
UK argues against EU citizens having special migration rights
Home secretary says post-Brexit immigration regime should treat everyone equally
Home secretary Sajid Javid on Tuesday defended the principle of denying EU citizens preferential rights to live and work in the UK after Brexit.
If his stance is adopted by the government, it could lead to a clash with the EU, which has said the bloc wants a post-Brexit partnership with the UK to include “ambitious provisions on the movement of natural persons”.
However, Mr Javid acknowledged the EU could win concessions in this area by indicating the bloc would be in a strong position to negotiate special rights for its citizens to live and work in the UK as part of a trade deal with Britain that is supposed to take effect after the Brexit transition period.
Mr Javid was giving evidence to the Commons home affairs select committee ahead of the publication this week of the government’s white paper about the UK’s future relationship with the EU.
He said the document would include a chapter on immigration — but that most of the government’s long-term strategy in this area would be outlined in a separate white paper due to be published in October.
He also made it clear that he would regard EU citizens as having no automatic qualification to better rights to visit, live and work in the UK than people from other countries around the world.
“We still want to be open to talent from across the world that can help us in some parts of our economy,” said Mr Javid. “There’s no magical reason it should be only from the EU and I think being a global Britain means that should be from across the world.”
Mr Javid’s comments were focused on EU citizens wanting to come to the UK after the Brexit transition period ends in December 2020.
Last month, he said EU citizens who have lived in the UK for at least five years would be eligible for a new “settled status” in the country after Brexit. Up to 3.8m people are expected to apply for this status.
Meanwhile, Mr Javid declined a chance to defend the government’s policy of reducing annual net immigration to below 100,000 — a target it has come nowhere near hitting since it was adopted in 2010, including while Theresa May was home secretary.
When asked if he would like to scrap the policy, he smiled and said: “Next question.”
Norway’s oil fund sells out of Warren Buffett-owned utility
Wealth fund pulls investment because of PacifiCorp’s use of coal
The world’s largest sovereign wealth fund has taken aim at Warren Buffett’s energy companies, excluding one from its portfolio and putting two others under observation because of their use of coal.
Norway’s $1tn oil fund has sold out of the bonds of US utility PacifiCorp while it has placed its parent company Berkshire Hathaway Energy and fellow electricity group MidAmerican Energy under observation, meaning that it could exclude them from its portfolio in the future.
The actions mark the latest in the oil fund’s ethical investment process that has seen it sell out of more than 100 companies due either to product exclusions — such as from makers of tobacco and nuclear weapons — or those related to conduct such as environmental damage or child labour.
The fund is on its fourth round of exclusions for companies that derive more than 30 per cent of their business from coal and the three companies were part of its examination of its fixed-income portfolio whereas previous exclusions focused on shareholdings. That review also led to the exclusion of Tri-State Generation and Transmission, a US electricity seller.
The oil fund owned $164m in bonds in Berkshire Hathaway Energy as of the end of last year, $129m in PacifiCorp, $43m in Tri-State, and $33m in MidAmerican.
Among other notable actions announced on Tuesday, the fund also excluded JBS, the world’s largest meatpacker that has been engulfed in corruption allegations in Brazil. It owned $143m worth of shares in JBS at the end of 2017, the last date for which it had disclosed its position.
Former JBS chairman Joesley Batista and his brother Wesley, the company’s chief executive, signed plea bargains last year admitting to corruption, including bribing more than 1,800 politicians over several years. The brothers almost brought down President Michel Temer in May 2018 after Joesley submitted a tape to prosecutors in which he allegedly discussed bribes with the Brazilian leader.
The oil fund also decided to exclude Luthai Textile, a Chinese owner of clothes factories, for systematic human rights violations while it placed Nien Hsing Textile, a Taiwanese company, under observation for the same reason.
Finally, it said it would follow the efforts of Indian chemicals group UPL to rid itself of child labour through its active ownership process for the next five years. The oil fund owns 2.3 per cent of UPL, shares worth $137m at the end of 2017.
The fund’s ownership approach is followed closely by many other investors. Among the companies excluded are groups such as Airbus, Boeing, Japan Tobacco, Rio Tinto and Wal Mart.
The fund recently laid out the results of its exclusions, saying it had lost out on just under NKr30bn ($3.7bn) in returns since 2006 because of the product exclusions on the likes of coal and nuclear weapons, equivalent to lowering the return by 0.1 percentage points a year for the past decade. But exclusions for bad conduct — such as Duke Energy and Posco for severe environmental damage — had boosted returns by an average of 0.04 percentage points each year.