Closing Market Summary: Averages Post Solid Gains Despite Lagging FinancialsStocks climbed for the second straight session on Tuesday, as investors turned their attention from geopolitical tensions to Q1 corporate earnings -- which have been largely upbeat thus far. The tech-heavy Nasdaq Composite was particularly strong, adding 1.7%, while the S&P 500 and the Dow finished with respective gains of 1.1% and 0.9%.
All three major indices closed above their 50-day moving averages -- which none of them had done since March 21 or earlier.
Big earnings names included Netflix (NFLX 336.06, +28.28), Goldman Sachs (GS 253.63, -4.25), Johnson & Johnson (JNJ 130.54, -1.22), and UnitedHealth (UNH 238.55, +8.23), all of which reported better-than-expected first quarter profits. Shares of Netflix soared 9.2% -- hitting a new all-time high -- after the streaming media giant crushed its subscriber growth estimates (+7.4 million actual vs +6.5 million estimates) and raised its guidance for Q2. UnitedHealth shares also advanced, adding 3.6%, while shares of Johnson & Johnson and Goldman Sachs declined 0.9% and 1.7%, respectively.
Goldman Sachs' performance was particular disheartening considering the company soundly beat both profit and revenue estimates for the first quarter. Financial giants JPMorgan Chase (JPM 110.21, 0.00), Wells Fargo (WFC 50.57, -0.23), Citigroup (C 69.74, -0.33), and Bank of America (BAC 30.04, +0.11) performed in a similar manner following their recent earnings beats, leaving some investors scratching their heads and others questioning the conviction behind of this recent equity rebound. The financial sector -- which typically holds a leadership position in broader market moves -- finished Tuesday at the bottom of the sector standings with a loss of 0.1%.
In addition to Goldman, another curve-flattening trade in the U.S. Treasury market weighed on the financial group. The yield on the benchmark 10-yr yield slid two basis points to 2.81%, while the yield on the 2-yr note climbed two basis points to 2.39%, cutting the 2s10s spread to 42 basis points. That's the lowest the 2s10s spread -- which points to the difference between what banks make on loans and what they pay on deposits -- has been since 2007 and represents a loss of 37 basis points since February 9.
However, the financial sector aside, Tuesday was a positive day on Wall Street, with advancing issues outpacing declining issues 2.7 to 1.
Netflix's upbeat earnings report helped push FAANG names higher -- Facebook (FB 168.66, +3.83), Apple (AAPL 178.24, +2.42), Amazon (AMZN 1503.83, +62.33), and Alphabet (GOOG 1074.16, +36.18) added between 1.4% and 4.3% -- which, in turn, helped push the consumer discretionary sector (+1.9%), which houses Amazon, and the technology sector (+2.0%), which houses the others, to the top of the sector standings. Tech giant Microsoft (MSFT 96.07, +1.90) also outperformed, adding 2.0%.
The CBOE Volatility Index (VIX) -- dubbed Wall Street's "fear gauge" -- dropped 10.0% on Tuesday to 14.89, which is its lowest level since early March. It's also worth noting that volume was relatively light on Tuesday, with just 720 million shares changing hands at the New York Stock Exchange; the 50-day moving average is 936 million.
Reviewing Tuesday's economic data, which included March Housing Starts and Building Permits and March Industrial Production and Capacity Utilization:
- Housing starts increased to a seasonally adjusted annualized rate of 1.319 million units in March (consensus 1.268 million), up from a revised 1.295 million units in February (from 1.236 million). Building permits rose to a seasonally adjusted 1.354 million in March (consensus 1.315 million) from a revised 1.321 million in February (from 1.298 million).
- The key takeaway from the report is that the monthly increases were driven entirely by multi-unit dwellings. Single-family starts were down 3.7% while single-family permits fell 5.5%, which is disappointing given the supply shortage of single-family homes.
- Industrial Production increased 0.5% in March (consensus +0.3%), while the February reading was revised to +1.0% (from +0.9%). Meanwhile, Capacity Utilization ticked up to 78.0% (consensus 77.8%) from an unrevised reading of 77.7% in February.
- The key takeaway from the report is that all three major industry groups played a part in driving the uptick in industrial production in March.
On Wednesday, investors will receive the weekly MBA Mortgage Applications Index and the Fed's Beige Book for March.
- Nasdaq Composite: +5.5% YTD
- Russell 2000: +2.9% YTD
- S&P 500: +1.2% YTD
- Dow Jones Industrial Average: +0.3% YTD
Liberty Global/Vodafone talks ongoing but scope still limited to CEE
17 APR 2018
Talks between Vodafone [LON:VOD] and Liberty Global [NASDAQ:LBTY] are going well, but remain limited to Central and Eastern European (CEE) assets, it is understood.
Vodafone confirmed in February it was in early-stage talks regarding “continental European assets” owned by Liberty.
Speculation soon began that talks would shift to previously-explored asset swaps, with Vodafone exchanging its UK and Dutch businesses for Liberty’s in Germany and the Czech Republic. At the end of February, Vodafone CEO Vittorio Colao was quoted as saying “we might also look at the UK”.
As it stands, Vodafone is looking to purchase Liberty’s Unitymedia in Germany, UPC Hungary and UPC Czech Republic, it is understood. This is still achievable, it was said.
The UK businesses are so far not included in the assets on the table, ruling out an asset swap structure, it is understood. An asset swap had been the preferred plan, a source briefed on the matter said.
It is still unclear whether Vodafone will sell its stake in VodafoneZiggo, its Dutch JV with Liberty, it was said. The sale of the Dutch JV stake would help it pay for the Liberty businesses, it was noted. The three CEE assets could cost Vodafone USD 20bn, one sector banker estimated.
There is also still uncertainty around whether a tie-up between Unitymedia and Vodafone Germany would be blocked by merger control regulators, it was said. Colao had to defend the potential deal after rival operator Deutsche Telekom’s [ETR:DTE] CEO Tim Hoettges said it would be “totally unacceptable” from a competition standpoint.
Liberty Global declined to comment. Vodafone did not respond to requests for comment.
SHANGHAI—China said Tuesday it will phase out rules requiring foreign auto makers to share their factory ownership and profits with Chinese companies by 2022, answering U.S. calls for a level playing field in the world’s biggest auto market.
China now forces foreign auto makers to set up 50-50 joint ventures with Chinese partners if they want to locally produce cars to avoid 25% tariffs. The government said these rules will be eliminated this year for companies building electric vehicles—a move that could benefit Tesla Inc. —and for all vehicles by 2022.
“This will completely change the situation in China within 10 years,” said Yale Zhang, managing director of Shanghai-based consultancy Automotive Foresight.
The action could bolster President Donald Trump’s assertions that his policy of pressuring China to modify its trade behavior is yielding swift results. Even so, people in the industry said the reshaping of China’s auto sector wouldn’t necessarily hand an advantage to foreign players, many of whom have come to rely on their Chinese partners.
These partners are often influential state-owned enterprises. Although foreign auto makers entered into the joint ventures reluctantly, some say they have come to accept them as a fact of life in a country where foreign businesses can struggle to succeed without local allies.
“We have no plan to change our investment ratio,” said Keitaro Nakamura, a China-based spokesman for Honda Motor Co., which operates joint ventures with local state-run auto makers Guangzhou Auto and Dongfeng Motor Co. “If we had this option 20 years ago when we were first coming into the market, we might have thought differently. But we’ve been working with them for two decades.”
Beijing established its joint-venture rules in the 1990s to enable fledgling Chinese auto makers to learn from foreign market leaders. The joint-venture structure proved a poor vehicle for technology transfer, however, and today China’s most capable auto makers are widely held to be private-sector players that have never been involved in foreign JVs, such as Great Wall Motor Co. and Zhejiang Geely Holding Group Co.
Even so, Chinese state-run auto makers have long argued against reforms to the joint-venture system to safeguard the healthy profits they generate from mass-producing foreign-badged cars for the China market.
The threat of a trade war with the U.S. appears finally to have eclipsed those arguments in the minds of Chinese policy makers. “I think the trade threat hastened it and forced the top to make a tough call after so many years of bureaucratic bickering and pushback by vested interests,” said a China-based executive at a foreign auto maker.
Michael Laske, China president of Austrian powertrain supplier AVL GmbH, called the action a “positive step forward for global trade” but added that the big winner would likely be China itself. Lifting limits on electric-car makers by the end of this year would encourage foreign investments from Tesla and others, helping China to strengthen its EV supply chain and become the world’s factory for EVs, he said.
While handing the U.S. an important concession, China wouldn’t have lifted investment restrictions unless “they felt they were ready to compete,” he said.
Chinese auto makers have already closed the gap on foreign rivals and would enjoy home-market advantages to help them compete in the future, such as favorable access to finance and land grants from local governments, Mr. Laske said.
Tesla, which has been struggling to complete a deal to open a plant in China, could be the chief foreign beneficiary of the changes announced Tuesday, if indeed they clear the way for the electric-car maker to open a wholly owned company here. Under earlier proposals floated by Chinese officials, Tesla would still have been required to pay import tariffs on cars built locally in free trade zones.
Last month Tesla Chief Executive Elon Musk appealed to Mr. Trump via Twitter for help in China. For a foreign auto maker, operating there was “like competing in an Olympic race wearing lead shoes,” Mr. Musk complained.
Tesla didn’t immediately respond to questions.
Rules requiring auto makers such as General Motors Co. and Ford Motor Co. to set up joint ventures were criticized by U.S. Trade Representative Robert Lighthizer’s investigation into Chinese trade practices last month, which triggered tit-for-tat punitive measures between the world’s two largest economies.
The U.S. investigation contended that China’s investment restrictions were a means of forcing foreign auto makers to transfer technology to local partners.
Last week, President Xi Jinping, addressing the Boao Forum in southern China, said those restrictions would be removed, in an apparent attempt to defuse trade tensions.
Mr. Xi also said that tariffs on foreign import vehicles would be significantly reduced from their current 25% level. Tariffs weren’t mentioned in Tuesday’s announcement, but auto analysts say that they are highly likely to be cut later this year now that Mr. Xi has personally promised to act.
Foreign-investment limits on companies building new energy vehicles—a term covering electric cars powered by batteries or fuel cells—will be removed this year. Limits on those building commercial vehicles and passenger cars will be lifted in 2020 and 2022, respectively.
For some auto makers, staying together could prove easier.
“GM’s growth in China is a result of working with our trusted joint-venture partners,” said a spokeswoman for GM, which builds cars in China with state-run Shanghai Auto. “We will continue to work with our partners to provide high-quality products and services to consumers.”
Ford, which operates two joint ventures in China and is in the process of establishing a third to produce electric cars said, “We are encouraged by the announcement this afternoon from the National Development Reform Commission, which is a clear demonstration of the Chinese Government’s commitment to further open the automotive industry. We will continue to monitor developments and look forward to learning more.”
A spokeswoman for U.S. trade representative Robert Lighthizer, who is leading the Section 301 trade case against Beijing, declined to comment on China’s steps to open up auto investment and underscored previous comments from the White House on the need for “concrete actions” from China. “We’re going to continue moving forward in the process and in the negotiations until those happen,” White House spokeswoman Sarah Sanders previously.
While some foreign auto makers said Tuesday they would stick with their joint ventures, Mr. Zhang, the industry analyst, predicted that most of China’s car-making joint ventures would be gone by 2030, with foreign companies unlikely to pass up the chance to operate independently.
Freed from their JVs, foreign auto makers would be able to retain all their China profits, and wouldn’t have to negotiate over strategy with a local partner.
With limits due to be swept away in 2022, foreign auto makers that want to go it alone now “have four years to arrange the divorce,” said Mr. Zhang.
However, foreign auto makers could find it difficult to extricate themselves from joint ventures that have existed in some cases for more than two decades; reaching an agreement on the JV’s valuation is likely to be one obstacle. And even if a price could be agreed upon, foreign auto makers might not be able to afford to buy out their Chinese partners, said Janet Lewis, Macquarie Capital Research’s managing director of equity research.
Fallout From Sanctions Against Russia Fuels Commodities Rally
Aluminum soars to six-year high on LME, while nickel and palladium also log hefty gains
Rising global tensions, including U.S. sanctions against Russia and the continuing conflict in Syria, have sparked a steep rally in commodities, sending materials from aluminum to oil to fresh multiyear highs.
The S&P GSCI Index of 24 commodities has climbed 5% this year, compared with a 0.2% gain for the S&P 500, the equities benchmark. The raw-materials gauge advanced for five straight sessions last week before slipping 0.8% Monday.
Russia is a key producer of a wide range of commodities from oil to palladium. And with supplies already tight, analysts say, the April 6 announcement of sanctions against more than three dozen Russian individuals and entities have jolted raw-materials markets.
Since then, aluminum for delivery in three months on the London Metal Exchange has soared 18% to its highest level in six years. The premium U.S. buyers pay to have LME aluminum delivered to the Midwest has also rocketed to its highest since February 2015, while other metals, including nickel and palladium, have climbed sharply.
Meanwhile, U.S.-led military strikes in Syria have stoked fears of a wider conflict in the Middle East. The worries, along with uncertainty surrounding the Iran nuclear deal, have propelled gains in oil, a large component of commodity indexes. U.S. crude on Friday hit its highest level since December 2014 and has rallied 9.6% this year.
The run-up in commodity prices is a shift from March, when global tensions between the U.S. and China over trade hurt prices of many resources amid fears that rising manufacturing costs would slow global growth.
“Now we’re kind of thinking that was maybe an overreaction,” said Bart Melek, head of commodity strategy at TD Securities. Instead, with the Russia sanctions, “you’ve got all this geopolitical stuff serving as an added bonus” to thinning inventories.
The sanctions hit Russian metals tycoon Oleg Deripaska, who controls the world’s second-largest aluminum producer, United Co. Rusal PLC. While China is the world’s dominant supplier, analysts estimate as much as 13% of the remaining supply could be disrupted.
Russia is an even more prominent producer of palladium, a metal used to scrub emissions in diesel engines, accounting for roughly 40% of global supply. Prices have climbed 12% since the sanctions were announced after tumbling at the start of the year.
And because Rusal owns 28% of Norilsk Nickel Mining & Metallurgical Co. , nickel has also gotten a boost. One of the best-performing commodities this year, it has extended its year-to-date gains to 15% on the LME.
“Supply had been tight already, and then you’ve got these geopolitical issues that are overlaying that,” said Nitesh Shah, commodities strategist at asset-management firm ETF Securities. “I’m quite optimistic for the metals.”
Traders have been rushing to close out any deals involving Russian metal before an LME ban on Rusal takes effect Tuesday. CME Group ’s Comex has also announced a ban on Rusal products, leading to massive swings in global aluminum stockpiles as traders speculate how Russian supply will be replaced.
The supply disruptions could prove critical for commodities because they come at a time when lukewarm global economic data and trade disputes have clouded the demand picture for many materials. Analysts will be closely watching Tuesday’s economic projections from the International Monetary Fund for the latest reading on the global economy.
Some think the recent price gains could be short-lived if a slowdown in China materializes. One worrying sign that the demand picture could be weakening: Copper prices have largely missed out on the materials rally, dropping 5.7% this year. China accounts for nearly half of the world’s copper demand and is the biggest consumer of commodities in general.
But others project that commodities can continue outperforming stocks and other assets this late in the economic cycle. More than $11 billion flowed into commodity exchange-traded and index funds in the first quarter, according to Citigroup estimates, up from nearly $8 billion in the year-earlier period.
“The strategic case for owning commodities has rarely been stronger,” Goldman Sachs analysts said in a recent note.
Nike Creates 3-D Textile for Running Shoes
Olympic marathon champion Eliud Kipchoge will wear the shoes at the London Marathon on April 22.
Called the FlyPrint, the sneaker is the latest iteration to be birthed from the Zoom Vaporfly Elite, the shoe worn by Eliud Kipchoge when he ran the fastest marathon ever last year.
Kipchoge was one of three Nike athletes in the brand’s highly publicized Breaking2 project who had attempted to break the two-hour marathon barrier. The Kenyan, who is also the defending Olympic champion, ran 2:00:25 in a private race on a Formula One track in Italy on May 6, 2017, wearing the Vaporfly Elite. His record for the race, which also used a team of pacesetters, was not recognized by the sport’s governing body, so four months later, Kipchoge was ready to take another shot at breaking the world record of 2:02:57 at the flat and fast Berlin Marathon. He won, but in a time of 2:03:32.
One of the problems was heavy rain and 99 percent humidity during the race, which didn’t sit well with the Vaporfly Elite shoes he was wearing. So Nike’s engineers and designers got to work on addressing the problem. And the result is the Nike FlyPrint, which sports a 3-D printed upper.
Kipchoge will wear the shoe when he runs the London Marathon on April 22.
“This started with a focus on the elite athlete,” said Brett Holts, vice president of running footwear for Nike. “We started with Eliud and then opened it up to our other athletes.”
Roger Chen, senior director of digital innovation, said Nike had been using 3-D printed technology for over a decade, but it was primarily for internal purposes to develop prototypes. But now, the brand upped the ante and employed the technology to create a textile for more-commercial purposes.
Informed by athlete data, the company changed the algorithm of the 3-D machine to control speed, heat and how the material is laid to create FlyPrint, which Nike boasts is the first 3-D-printed textile in performance footwear.
The new shoe is 12 grams, or 6 percent lighter than the Vaporfly Elite, and has a more-efficient moisture-wicking ability, Chen explained.
Holtz said that although the creation of the shoe was for Nike’s elite running squad, “we see it as an additional tool for lightweight uppers for the future.” In fact, a small commercial run of the shoe will be available to the public during the London Marathon. The price will be $600.
“We’re just building the machinery now, but we see this becoming scalable in 2019 and moving beyond racing flats,” Holtz said.
It also speaks to the whole move toward personalization in both footwear and apparel. “That’s the vision for the industry,” Holtz said. “And this capability moves us closer to that.”