Closing Market Summary: Wall Street Starts the Week on a Positive NoteEquities opened the week with a comfortable victory on Monday, reclaiming around half of last week's losses. The Dow Jones Industrial Average led the rally, jumping 1.4%, while the S&P 500 and the Nasdaq Composite climbed 1.1% and 1.0%, respectively, and the small-cap Russell 2000 added 0.9%.
The threat of a trade war was still on investors' minds on Monday morning, leading to a lower open on Wall Street, but House Speaker Paul Ryan (R-WI) helped ease concerns by publicly opposing the tariffs on steel and aluminum imports that President Trump proposed last week. Mr. Trump responded by saying that he was "not backing down" from his plan, but he did leave a door cracked for Canada and Mexico, saying that the two countries may be able to sidestep the tariffs if they agree to a "new and fair" NAFTA deal.
The S&P 500 opened with a loss of around 0.6%, but started climbing about an hour into the session. The benchmark index eventually finished just a tick below session high, with each of its eleven sectors settling in positive territory. The utilities group (+2.0%) led the charge, but the influential financial sector (+1.4%) wasn't far behind. The heavily-weighted health care and technology spaces were the weakest performers, but still finished with gains of 0.9% apiece.
In corporate news, the U.S. government ordered Qualcomm (QCOM 64.01, -0.73) to delay its much-anticipated shareholder meeting, which was originally scheduled for Tuesday, as it reviews Broadcom's (AVGO 246.98, -3.89) hostile bid to takeover the company. The shareholder meeting was expected to feature a vote on whether to replace six of 11 directors with nominees put forth by Broadcom. Bloomberg reported on Monday afternoon that Broadcom was on track to win the six seats.
Overseas, equity indices in Europe finished mostly higher, but Italy's MIB (-0.4%) underperformed after Sunday's national elections failed to produce a clear winner. Meanwhile, in Germany, the CDU and SPD parties agreed on their governing coalition, thereby removing any leadership uncertainty in Europe's largest and most influential economy.
In Asia, stock markets finished on a mixed note, with Hong Kong's Hang Seng (-2.3%) showing relative weakness.
Investors received just one piece of economic data on Monday, the ISM Services Index for February, which came in better than expected (59.5 actual vs 58.8 consensus). The key takeaway from the report is that business activity in the non-manufacturing sector is still running at a healthy level, which is contributing to rising costs.
Outside of equities, U.S. Treasuries finished Monday on a lower note, pushing yields higher across the curve; the benchmark 10-yr yield climbed two basis points to 2.88%. Meanwhile, West Texas Intermediate crude futures rallied 2.2% to $62.56 per barrel as energy leaders from around the globe headed to Houston for CERAWeek.
Shiseido Outlines New Strategy, Sets Three-Year Sales Target
Aiming to become the "most trusted" beauty company, it will invest in marketing, digitization, and a restructured supply system.
TOKYO—After reaching its 2020 sales goal of 1 trillion yen ($9.45 billion) at the end of last year, Shiseido has unveiled an ambitious new three-year plan aimed at further accelerating its growth.
The plan is the second stage of the Japanese beauty company’s medium-to-long-term strategy, which it calls “Vision 2020.” While the first three years of the strategy, which ran from 2015 to 2017, focused on restructuring, the next three will be dedicated to building on the company’s success. It now hopes to reach 1.2 trillion yen in sales by 2020.
At a media gathering at its Ginza office Monday, Shiseido’s president and chief executive officer Masahiko Uotani said that he wants to strengthen the company’s governance in order to make it the most trusted company in beauty. He also stressed the importance of refocusing Shiseido’s brand strategy, while emphasizing digitization, innovation, human resources, and a global management structure.
In terms of refining the brand strategy, Shiseido will focus first and foremost on prestige brands, which include its namesake brand as well as Clé de Peau Beauté, Nars, BareMinerals, Laura Mercier, Dolce & Gabbana, and Ipsa.
“Among the prestige brands, there are three categories: skin care, makeup and fragrance,” Uotani said. “We will grow the prestige skin care category, in which Shiseido is already strong, even more. By growing our skin care business over these next three years, we will also become stronger in the category of makeup.”
Measures Shiseido will take in the area of prestige brands include working with retailers to develop products and improve visual merchandizing, improving its social media presence, and creating cross-border marketing initiatives that mainly target Chinese consumers, but will eventually expand across Asia and the rest of the world.
Uotani said he expects the prestige brands to make up around 71 percent of Shiseido’s total business between now and 2020, which would be 10 percent growth in share size. He forecasts that fragrances will account for about 10 percent of the 71 percent share.
In Asia, Shiseido will also expand its cosmetics and personal care brands. Four brands that are currently only available in Japan—Elixir, Anessa, Senka and Integrate—will be expanded into China and other Asian regions.
“Mid- and low-priced products that are made in Japan are extremely well trusted among Asian and Chinese customers, and this is a very important area for Shiseido as a Japanese company,” Uotani said.
The executive said the company will invest a total of 120 billion yen in marketing activities over the next three years. An additional investment of 130 billion yen will be used to restructure its supply system, build new factories, and strengthen cooperation with suppliers. On the other hand, Shiseido will aim to reduce costs by 40 billion yen over the same three-year period. It will do this by improving efficiency in its supply chain, improving productivity, and system integration.
Shiseido is also placing greater importance on digitization and new technologies. In addition to strengthening its e-commerce activities, it will also integrate its business processes between its Tokyo headquarters and regional offices, build an integrated IT platform, and centralize data, which will require a total investment of 27 billion yen over three years. Shiseido has already shown a strong interest in developing and utilizing new technologies, and it will continue to expand its activities in this area. Its acquisitions of Match Co. and Giaran, as well as its proprietary IoT technology Optune, will facilitate the forays into new technologies. Uotani said the company is open to additional acquisitions of prestige brands, new technologies, and new businesses.
“If there is an opportunity for the acquisition of these kinds of things, we will focus our attention on it at that time,” the executive said. “Right now we have absolutely no plans for immediate acquisitions, but I would like to continue looking at opportunities.”
Shiseido also released its guidance for the current fiscal year, ending Dec. 31. It is expecting net income to more than double, totaling 54 billion yen. It predicts operating income will grow by 11.9 percent to 90 billion yen, which it says will be due to higher margins accompanying a predicted sales increase. The company is forecasting sales growth of 2.8 percent to 1.03 trillion yen.
Trump’s tactics on tariffs
US president’s plans for steel and aluminium duties cannot be classed as smart or sensible
Could there be some far-sighted political justification for President Donald Trump’s proposed steel and aluminium tariffs? Could it be that whatever immediate economic harm the measures will do, they could serve to boost the credibility of the overall trading system and Americans’ faith in it? The obvious answer, “no”, is the correct one. But it may be worth looking at how similar actions have been used in less-than-catastrophic ways in the past.
The ostensible economic justification for trade defence instruments is to counter unfair actions by foreign exporters or by governments, or to prevent disruptions to markets by cushioning domestic producers from the immediate shock of a sudden flood of imports.
Their often unspoken function is as a political pressure relief valve, to give companies and workers the impression that even binding international agreements can be mitigated in the light of pressing circumstance. Thus, so the argument goes, they can help keep markets open by furthering political legitimacy for the system.
Alan Wolff, now the deputy director-general of the World Trade Organization and formerly a well-known Washington trade lawyer, always used to compare trade defence to putting a seatbelt in a car: it might restrict your immediate freedom of movement but makes it safer to move forward quickly.
This theory has some validity, though with fairly serious drawbacks. One is the threat that the pressure valve is put at such a sensitive setting that it stops the engine running at all. There were many reasons that the Doha round of multilateral trade talks collapsed in 2008, but the final trigger was a row over a special safeguard mechanism for agricultural products in developing countries.
Farm exporters complained that the SSM, unsurprisingly pushed by India, the habitual agricultural protectionist, was so easy to use that it would have left them facing less, rather than more, market access overall. Another is that if the use of trade defence instruments violate WTO law, they undermine rather than advance the wider cause of rules-based trade.
Still, there are some examples inside and outside the US where the discretionary use of trade defence instruments may have served useful political ends. Barack Obama’s tyre tariffs against China in 2009, a “Section 421” action based on provisions in China’s accession agreement to the WTO, had a very weak economic justification. They ending up wasting money and saving few jobs. But they were WTO-legal, did not in fact open the floodgates to a succession of similar actions and may have been useful in buying labour union backing for the Obama administration’s plans for healthcare reform. Broader health coverage, by reducing reliance on employer-supplied plans and hence cutting the catastrophic cost of job losses, probably helped build support for globalisation at the margin.
In 2005, the expiry of global textile quotas under the Multi Fibre Arrangement came at a time when the Chinese labour-cost arbitrage export machine was in overdrive, leading to a surge of garment imports into advanced economies. The US and EU cited a textile-specific safeguard written into China’s WTO accession agreement, and concluded deals to slow the flood. In the EU, the resulting spat between garment retailers and domestic European manufacturers was dubbed the “bra wars”. It was politically embarrassing for the European Commission, which had not seen the issue coming. And yet, ultimately, after transitional agreements were signed, the flow of Chinese garments resumed and the welcome move towards a freer global clothing market ushered in by the end of the MFA continued.
The George W Bush steel safeguards of 2002, involving tariffs of 30 per cent on some products, are far harder to justify. Bush administration officials argue that they at least won enough confidence on Capitol Hill to get trade promotion authority granted to the White House, enabling the administration to go out and negotiate bilaterals. Sceptics regard a temporary ploy to win the midterm elections by buying support in the midwest rust-belt states as a more likely explanation.
The decision was taken in the cynical knowledge that the WTO would likely rule the safeguards illegal after they had done their job. Certainly, the political tension and conflict that the tariffs injected into the world trading system, with the EU and other countries preparing retaliation, makes it extremely hard to imagine that the net effect on the atmosphere for trade liberalisation was positive.
The Trump tariffs, as they have been announced, have none of the redeeming features of the above episodes. They are broad-brush: even the Bush steel tariffs exempted Canada and Mexico. They may or may not be WTO-legal, but in any case they certainly do not rely on a tightly written measure designed for that purpose. Rather, they seek to exploit a vague national security exemption that could serve as an excuse for widespread protectionism. And far from a tactical concession to build confidence in trade, they are part of a full-on assault on its functioning that is likely to poison the atmosphere throughout global system.
History suggests there can be tactically sensible uses of discretionary trade defence instruments. Mr Trump’s proposed tariffs are not among them.
Mediaset: look away now
Silvio Berlusconi has found himself in a weakened position, much like his Italian broadcaster
Silvio Berlusconi had to avert his gaze from a topless female protester when he voted on Sunday in Italy’s national elections. The media mogul and former prime minister could have been forgiven for flinching when the result was reported, too. The centre-right coalition he fronted did not do as well as he hoped. This makes things harder for Mr Berlusconi’s broadcaster Mediaset at home. Its overseas interests should compensate.
Mediaset, controlled through Mr Berlusconi’s holding company Fininvest, managed to increase its share of Italian television advertising to just under 60 per cent in the nine months to September. TV accounts for almost two-thirds of total Italian ad spend, but it is shrinking. Last year, it fell almost 2 per cent
Rival state broadcaster RAI receives both a licence fee and ad revenue. Mediaset had hoped the regulator might restrict how much RAI could make from commercials. If the populist Five Star Movement, which got more votes than expected in the election, manages to form a government then those hopes would dim. This partly explains Monday’s 5 per cent fall in Mediaset shares.
Another concern will be Mr Berlusconi’s weakened position in any negotiation with Vincent Bolloré’s Vivendi. The two companies are locked in a legal battle over the alleged breach of the former’s agreement to acquire assets from the latter. The next hearing is not until October. Analysts had pencilled in anywhere from €750m to €1bn of payments from Vivendi should it lose this case, adding a quarter to Mediaset’s value.
Having said all this, Mediaset is not just about Italy. Excluding both the group’s holdings in Mediaset España — of which Mediaset owns more than half — and its infrastructure segment EI Towers, core Italian broadcasting represents 40 odd per cent of the group’s market value. Spain made all the group’s profits in 2016, and should do much the same in 2017 — full-year results are due next month. Though ad revenues were flat at Mediaset España, last year it lifted profits smartly via cost cutting. EI Towers business, for now, provides a stable income stream. A hoped-for merger with RAI’s tower business may, however, be postponed.
The election has diminished the standing of Mr Berlusconi. Sluggish ad spending is having the same effect on Mediaset. Mercifully for investors, businesses can resist obsolescence for longer than politicians.
Italy’s next government: four options as voters shun establishment
Populist tide wipes out prospect of centre-left and centre-right grand coalition
The populist tide that swept across Italy on Sunday wiped out the prospects of a grand coalition between Matteo Renzi’s centre-left Democratic Party and Silvio Berlusconi’s centre-right Forza Italia party — which had been the most likely expected outcome of the vote. So what is left? Here are four scenarios, starting with the most unsettling one for the European mainstream.
The populist alliance
Five Star and the League could comfortably secure a parliamentary majority with the support of Brothers of Italy
The big winners of the night were the Five Star Movement, the upstart protest party founded in 2009 by comedian Beppe Grillo, and the Northern League, which has been revived and transformed into a far-right nationalist party by its leader Matteo Salvini.
Arithmetically, they could join forces and comfortably secure a parliamentary majority with the support of Brothers of Italy, a smaller rightwing party that descends from postwar neo-fascism.
Their platforms have big areas of overlap. Both support the rollback of pension and labour market reforms, higher deficits to fund fiscal expansion, share a visceral opposition to free trade, want friendly relations with the Kremlin and dislike mandatory vaccinations.
They are on similar wavelengths about the euro. While both toned down their rhetoric on exiting the single currency during the campaign, they believe Italy has been damaged by the euro and needs to succeed in imposing major changes or that it would be best to ditch the project.
But if there is a logic to such an anti-EU alliance, the big question is whether the bases of both parties would rebel at the prospect of a tie-up.
The Northern League has made some gains in the south, but remains predominantly rooted in prosperous northern regions, where there is deep wariness of any big fiscal transfers to the Mezzogiorno.
Five Star has proposed a sweeping income support programme for the poor that has drawn a lot of support in southern regions, and would not want to give that up.
Many Five Star supporters — particularly in the south — also remember the days when Northern League politicians systematically insulted them as backward and lazy. And Five Star’s base tilts to the left, so Mr Salvini’s alignment with Marine Le Pen and Donald Trump is anathema to them.
The League in control
The League would need to find PD lawmakers willing to join it if it were to try and form a government
Since the Northern League has emerged as the dominant force of the centre-right coalition that won the greatest share of votes on Sunday, it could be legitimately asked by Sergio Mattarella, Italy’s president, to have the first shot at forming a government.
That is certainly what Matteo Salvini, the party leader, had in mind when he spoke on Monday in Milan and ruled out any “strange alliances” — a veiled reference to a tie-up with Five Star.
“We want to govern with the centre-right,” he said. In an ideal world for Mr Salvini, his coalition would also have won absolute majority of seats, paving his path to Palazzo Chigi. But that seems out of reach based on the latest projections, since Five Star has triumphed across the south at the expense of Silvio Berlusconi’s Forza Italia.
The only solution for Mr Salvini would be to look for willing defectors from the centre-left in order to get over the hump. But that would be extremely challenging. Mr Salvini would probably have to give up his ambition to be prime minister in favour of more moderate figures within his own party, such as Roberto Maroni, the former governor of Lombardy, or Luca Zaia, the governor of the Veneto region.
That might help him win a clutch of centrist politicians such as Pierferdinando Casini, who have a habit of straddling the left and the right depending on where the winds are blowing. Yet it might still not be enough. Ultimately Mr Salvini would have to find PD lawmakers willing to jump the fence — a very difficult mission.
Turning left
Five Star-led would look to Free and Equal to form a leftwing majority but would need PD support too
If Five Star decides it cannot stomach a deal with the Northern League, it could turn left and search for allies among the dispirited remnants of Italian social democracy to secure a governing majority.
The first place it would start is Free and Equal, the grouping of leftwing former PD dissidents — including Pier Luigi Bersani, the former party secretary — who barely managed to secure representation in parliament but will control a few dozen seats.
Mr Bersani in particular has often appeared to be sympathetic to such a tie-up if it means keeping the nationalist right out of office.
Five Star’s economic team definitely tilts to the left — with a focus on reducing inequality through social spending that its officials say is very aligned with the views of economists such as Joseph Stiglitz and Thomas Piketty.
But the inescapable truth is that any leftwing majority led by Five Star would have to draw in the PD — or big parts of it — to make the numbers stack up. The main obstacle to that combination was always Matteo Renzi, but after the ruling party’s poor performance in the elections it could plausibly have new leadership that is not quite so radioactive for Five Star.
But PD MPs are still overwhelmingly reformist on economic matters and not prepared to take a leftward turn. Moreover, they have been deeply wounded by a relentless barrage of Five Star attacks over the years and would recoil at sharing power with them.
All for one
If there is no working political majority, Sergio Mattarella, Italy’s president, could ask all the parties to form a national unity government
If none of these options pan out — probably after weeks of talks — Sergio Mattarella, Italy’s president, may have to accept that there is no working political majority. At that point, one solution would be to ask all political parties to agree on a national unity government, for a limited time — to keep the ship steady until a second election down the road.
It would be a “president’s government” as can sometimes happen in moments of political crisis in Italy — with the broadest possible support. Every party would have to sign off on the interim prime minister and the deal could only work if all the major parties signed up to it in the name of saving Italy from a total drift into instability.
That might, in some ways, guarantee the greatest stability for the country. But there are serious challenges with this solution.
One is that Mr Mattarella is instinctively averse to a second election. The other is that the political parties would have to agree on rewriting the country’s electoral laws in order to avoid another stalemate in the next election — and there is no consensus on such a system.
Meanwhile, Five Star and the Northern League would probably become restless very quickly, feeling that they were backed by voters who wanted dramatic change, not just another patch-up.