Closing Market Summary: Investors Take Profits After Senate Calls for Corporate Tax Cut DelayU.S. equities retreated from record highs on Thursday as investors took some profits following a largely uninterrupted two-month rally. The major indices finished near the top of their trading ranges, with the S&P 500 and the Dow losing 0.4% apiece. The tech-heavy Nasdaq (-0.6%) underperformed as technology shares faced particularly heavy selling.
The Senate released its version of a tax reform bill, which called for delaying a cut in the corporate tax rate by one year and differed from the version that the House unveiled last week in several other key areas--including property tax, mortgage interest, and medical expense deductions. The two chambers will have to hammer out those differences in order to put the bill on the president's desk for approval, and doubts surrounding Congress' ability to do just that were cited by some as the main catalyst for Thursday's sell off.
More likely, however, the Senate's unveiling provided a convenient excuse for investors to take some money off the table following yet another record high run for the major U.S. indices. All three major averages finished the prior session at fresh all-time highs and have added between 5.0% and 7.6% since September 8.
Technology shares within the S&P 500 were particularly weak on Thursday, losing 0.9%. Chipmakers paced the tech retreat, sending the PHLX Semiconductor Index lower by 2.0%, with names like Broadcom (AVGO 265.64, -6.76) and Advanced Micro (AMD 11.12, -0.59) losing 2.5% and 5.0%, respectively.
The industrial sector (-1.3%) did even worse, settling at the bottom of the sector standings, while a handful of groups managed to move modestly higher--including consumer discretionary (+0.2%), energy (+0.3%), utilities (+0.1%), and telecom services (+0.3%).
Shares of 21st Century Fox (FOXA 28.70, +0.61) jumped 2.2% after the media giant reported better-than-expected earnings and sales for its fiscal first quarter. Peers like Walt Disney (DIS 102.68, +1.50), CBS (CBS 58.08, +0.83), and Viacom (VIAB 24.78, +0.48) moved higher in sympathy, adding between 1.5% and 2.0%.
Retailers outperformed as well, evidenced by the 1.6% increase in the SPDR S&P Retail ETF (XRT 39.71, +0.64). Macy's (M 19.50, +1.93) led the retail advance, surging 11.0% after reporting above-consensus earnings for its fiscal third quarter and reaffirming its guidance for 2018.
In other corporate news, CNBC reported that the Department of Justice has not set a requirement for Time Warner (TWX 87.05, -1.45) to sell CNN in order to be acquired by AT&T (T 34.00, +0.56), as was reported on Wednesday. Time Warner shares slipped 1.6%, while AT&T shares climbed 1.7%.
U.S. Treasuries ended on a mixed note, with shorter-dated issues showing relative strength while longer-dated issues exhibited relative weakness. The benchmark 10-yr Treasury note finished flat, however, with its yield settling unchanged at 2.33%. Meanwhile, the U.S. Dollar Index dropped 0.4% to 94.42, and WTI crude futures climbed 0.6% to $57.14/bbl.
Elsewhere, Japan's Nikkei had an unnerving bout of volatility on Thursday before ending little changed (-0.2%), while the Euro Stoxx 50 tumbled 1.0%.
Reviewing Thursday's economic data, which was limited to the weekly Initial Claims Report and September Wholesale Inventories:
- The latest weekly initial jobless claims count totaled 239,000, while the consensus expected a reading of 231,000. Today's tally was above the unrevised prior week count of 229,000. As for continuing claims, they rose to 1.901 million from the unrevised count of 1.884 million.
- The key takeaway is that initial claims, which remained below 300,000 for the 140th straight week, are low and indicative of a tight labor market.
- September Wholesale Inventories increased 0.3% (consensus +0.3%). The prior month's reading was revised to +0.8% from +0.9%.
- The key takeaway from the report is that the sales increase outpaced the inventory increase by a sizable margin, which is a step in the right direction for wholesalers trying to regain some pricing power.
On Friday, investors will receive two economic reports--the preliminary reading of the University of Michigan Consumer Sentiment Index for November (consensus 100.5) and the October Treasury Budget. The two reports will be released at 10:00 ET and 14:00 ET, respectively.
- Nasdaq Composite +25.4% YTD
- Dow Jones Industrial Average +18.7% YTD
- S&P 500 +15.5% YTD
- Russell 2000 +8.7% YTD
Vodafone has the fibre to challenge Openreach-Virgin duopoly
Competitor in full-fibre broadband race resorts to trench warfare
Laying much-needed fibre connections direct to Britain’s homes (FTTH) has been made a lot easier. A new vehicle, not unlike a very small tractor, can now roll along the side of the pavement and cut a small “microtrench” into the tarmac — removing the need to dig up the whole road. It can even go round corners, and cul-de-sacs.
Vodafone evidently approves of the principle. Because it seems to have found an equally efficient way of breaking up BT Openreach’s and Virgin Media’s near duopoly, without recourse to a regulatory pickaxe. It could even result in a U-turn in the way future infrastructure is funded.
On Thursday, Vodafone said it was entering a long-term strategic partnership with CityFibre — driver of those tiny tractors — to bring ultrafast full-fibre broadband to up to 5m UK homes and businesses by 2025. Under a capital expenditure programme of £500m-£700m, CityFibre will build a fibre network in 12 cities, which Vodafone will market and use on wholesale terms.
They described it as “one of the most significant developments in UK telecoms since the launch of ADSL broadband around 17 years ago. Its real significance, however, may be in how it challenges the dominance of BT Openreach in the next 17 years.
Vodafone and City Fibre are effectively parking their little tractors on Openreach and Virgin Media’s front lawn — by creating a third competitor network in second-tier cities across Britain. Openreach had been in talks with Vodafone and others about teaming up to deliver more fibre to the home — after much groundwork by regulator Ofcom. But, judging by the language used today, Vodafone does not exactly dig Openreach’s plans. Its UK chief executive Nick Jeffery said the country was “trapped by the limited choice available on legacy networks” and suggested CityFibre’s was the network Britain “needs and deserves.”
It seems to come down to copper — and brass. Vodafone wants Openreach to stop scraping as much cash as it can from its old copper wire assets and invest more heavily in fibre. Openreach has instead proposed that it fund a further FTTH buildout by raising wholesale prices for customers such as Vodafone.
With its CityFibre deal, Vodafone shows there is an alternative. However, it is not a complete alternative: even if it goes from 1m FTTH connections by 2021 to 5m by 2025, that is only 20 per cent of the country. Openreach has pointed out that it is well on the way to 2m connections already, and is actually investing £1.6bn a year. It will deliver its more detailed proposals for funding a wider fibre rollout before Christmas.
Still, if Vodafone and CityFibre’s little tractors gain traction, they may show the industry — and the regulator — that higher wholesale prices are not the only route to broadband customers’ doors. There are other ways to change the telecoms landscape.
Saudi Arabia Orders Citizens Out of Lebanon
Decision escalates crisis in country caught between regional rivals Riyadh and Tehran
RIYADH, Saudi Arabia—The Saudi government on Thursday ordered its citizens to immediately leave Lebanon, escalating a regional crisis in a country that has long been a battleground in the rivalry between Saudi Arabia and Iran.
“In the light of the current situation in Lebanon, the kingdom asks its citizens living or visiting Lebanon to leave as soon as possible,” Saudi Arabia’s foreign ministry said in a statement it posted on its Twitter account.
The warning comes less than a week after Lebanon’s prime minister, Saad Hariri, left Lebanon for Saudi Arabia, where he resigned from his post, citing the destructive role in the region of Iran and its Lebanese proxy, the Shiite political and militant group Hezbollah.
Saudi Arabia is a longtime patron of Mr. Hariri, who leads Lebanon’s main Sunni bloc. Saudi Arabia’s aggressive posturing deepens the political uncertainty in the tiny Middle Eastern country, which is already strained by sectarian tensions.
Saudi Arabia considers Hezbollah, the dominant political force in Lebanon, a terrorist organization. It has grown increasingly alarmed by the group’s ascendance in Lebanon and elsewhere in the region.
Goldman draws investor ire over Verisure bond deal
Debt sale draws scrutiny as investors are offered different terms
GS has drawn the ire of investors in Europe’s high-yield market after a fund controlled by the US investment bank looks set to benefit more than many other bondholders from a corporate deal that it is advising on.
Some bondholders in Verisure, a Swedish home alarms company owned by US private equity house Hellman & Friedman, complain that they have been offered far smaller fees to permit H&F to raise new debt to pay itself a €1bn dividend.
H&F, which secured control of the Swedish company in 2015, is having to pay fees because the terms of Verisure’s existing bonds forbid such a large dividend payment. While the payments promised to holders of Verisure’s senior secured bond under a process of “consent solicitation” amount to just €9.45m, owners of the company’s “private senior” bonds, which include the Goldman fund, will receive €28m, according to the terms published for the pending deal.
An investor who owns Verisure’s secured bonds said that the different treatment of the two securities was striking. “Is Goldman saying: we would never do this on bonds we own, but we’re asking you to do it?”
Verisure’s debt sale is the latest flashpoint in a European junk bond market in which the European Central Bank’s quantitative easing programme has helped drive yields to record lows, leaving investors on the back foot as companies raise fresh debt or refinance existing borrowings.
The difference between the two sets of fees stems from the “consent solicitation” process, which would allow H&F to give a financial sweetener to owners of the €630m of senior secured bonds instead of handing over a much larger “pre-payment” that would be more typical. While several banks are advising on the deal, Goldman Sachs is the sole “solicitation agent”.
By contrast, the consent solicitation does not extend to the €692m of “private senior” bonds, which will receive the much larger pre-payment fees. A mezzanine fund controlled by Goldman Sachs is one of the investors in these riskier unsecured bonds, which were issued in late 2015. Reports at the time said that the Goldman fund bought €500m of bonds. Goldman Sachs declined to comment. H&F could not be reached for comment.
“The sponsor will receive its €1bn dividend and holders of the private senior notes will receive €28m in pre-payment premium,” said Scott Josefsberg an analyst from Covenant Review. “For allowing these transactions, investors in the secured notes should demand their fair share because they are entitled to their make-whole premium too.”
Funds controlled by Goldman Sachs commonly invest in the riskier “junior” debt of leveraged buyouts, a technique that has given the US bank more firepower in the competitive world of debt underwriting. Yet it can cause tensions. Debt investors, for example, in Avantor’s recent LBO forced changes to terms governing preferred stock, which an affiliate of Goldman was investing in it.
“It creates a lot of noise on something like Avantor, but to be fair to them [Goldman Sachs] it means that they are taking on risk as well,” said one debt investor, however.
In the case of Verisure, H&F also has a greater incentive to repay the private bonds earlier, as the premium equates to 4 percentage points, lower than public notes’ 9 per cent make-whole premium.
The Verisure bondholder added that he did not expect the majority of investors to oppose the consent solicitation, which expires at 4pm on Thursday, as the security company then plans to issue over €1.1bn of new unsecured bonds.
“A lot of people really want to participate in the new unsecured deal and will be worried that they won’t get a good allocation if they don’t consent,” he said. “But if it passes it’s a ridiculously lopsided outcome.”
Iran alarmed at rising tensions with Saudi Arabia
Tehran muzzles hardline mouthpiece but doubles down on regional ambitions
The depth of Iran’s alarm at rising tensions with Saudi Arabia, its main regional rival, became clear this week with the temporary closure of a newspaper closely allied with hardliners.
In Monday’s Kayhan, a headline hailed a ballistic missile attack by Iran-backed Houthi rebels on Riyadh, an assault Saudi Arabia said was an act of war by the Islamic Republic.
The daily even suggested that Dubai would be the next target of the Yemeni rebels, which are engaged in a bitter proxy war with their Saudi-backed rivals.
The report prompted alarm in Tehran, where the official line is that it is not involved in the civil war in Yemen.
The Supreme National Security Council on Wednesday accused the state-run paper of acting against national security, and the hardline judiciary ordered a two-day closure — a rare punishment for Kayhan whose editor is appointed by Ayatollah Ali Khamenei, Iran’s supreme leader.
The decision to close the paper highlights a tactical shift by the Islamic Republic, keen not to anger Saudi Arabia or the US even as it doubles down on its regional ambitions.
“This was a clear message to the world that the headline did not reflect Iran’s policy,” said a senior adviser to Iran’s foreign ministry.
“While Iran has not taken the possibility of direct military confrontation with Saudi Arabia seriously and has no intention of retreating from its regional policies, it wants to avoid any escalation because the opposite front — US, Israel and Saudi Arabia — is bigger and stronger.”
Iran and Saudi Arabia — self-proclaimed custodians of Shia and Sunnis in the Islamic world respectively — are locked in a power struggle that has intensified since the conflict in Syria. The election of Donald Trump, who is determined to rein in Iran and has deepened the US alliance with Saudi Arabia, has shifted the balance in their proxy wars.
In the past week alone, Iranian officials and political observers have been shocked by the missile attack on Riyadh and the sudden resignation of Saad al-Hariri as Lebanese prime minister. Riyadh had pushed for him to go in apparent protest at Tehran’s backing of the Hizbollah militia.
Iran’s carefully calculated approach towards the US and Saudi Arabia, which Hassan Rouhani, the centrist president, and the hardline Revolutionary Guards both support, is designed to limit the chances of military confrontation and safeguard the nuclear deal agreed in 2015 with major powers. The US president has refused to certify the nuclear accord, leaving the decision to Congress, which has until the end of this year to decide whether to re-impose crippling sanctions.
At the same time, Iranian analysts say Riyadh is determined to undermine Iran’s support for Lebanon’s Hizbollah, its main proxy force, reduce its influence in neighbouring Iraq and cut aid to the Houthis. This, they say, would help Saudis ease tense political infighting.
“Saudis are pushing to create an international consensus against Iran,” said Saeed Laylaz, a reform-minded analyst. “Saudi’s young leaders need to have controllable levels of crises with Iran to help smooth the succession of the crown prince [Mohammed bin Salman] from his father and his social and economic reforms.”
While Iran has made the conscious decision not to react angrily to any provocations, there is no sign that it is considering any retreat on its regional policies.
“Iran is aware that taking one step back means the Saudi-US-Israel alliance will become more aggressive,” said the adviser. “We cannot sit back and recognise Saudi hegemony in the region. Any concessions by either side can happen only through talks not conflicts.”
With the two sides already active in Yemen, some in Tehran now fear Lebanon could become a new pressure point.
“Iranian leaders think they are playing a chess game with the US and Israel which may show itself in a Iran-Saudi power struggle in Lebanon — a Pandora’s box where a conflict may start but might end up in Israel,” said Nasser Hadian, a reform-minded university professor of international relations.
“No one in Iran believes that Saudi Arabia — which could not even succeed in a Yemen with absolutely no power — would dare to strike Iran.”
The rivalry could also intensify in Iraq. More than 2m Iranian pilgrims went to southern Iraq on Thursday to mark the 40th day of martyrdom of Hossein, the third Imam of the Shia, in a display of power. “This gathering shows our potential but we are not going to use it unless necessary,” said the adviser.
“In the worst-case scenario, if there will be any military confrontation, Iran will respond with all its visible and invisible forces around the world and target Saudi Arabia, US and Israel which will create a big mess for everyone for a long time.”