Closing Market Summary: Stock Market Closes Thursday Modestly LowerA wait-and-see attitude lingered throughout today's trading session, but the rubber will finally meet the road tomorrow when Donald Trump becomes the 45th President of the United States and gets a chance to deliver on promises that drove the stock market to a fresh record high. The S&P 500 and the Nasdaq closed lower by 0.5% and 0.3%, respectively.
The stock market enjoyed a huge post-election advance, rallying on the vision that Donald Trump promised his electorate; deregulation of the financial industry and increased infrastructure spending. But with over two months to price-in those hopes, investors haven't had much to do as of late but sit back and wait.
This notion has been most apparent in the financial sector (-0.6%), which has been weak despite a growing batch of better-than-expected earnings reports. But in the same breath, after the sector's huge 20.5% Q4 advance, earnings reports are more likely to invoke a "sell-the-news" response.
However, that's not to say the stock market hasn't had its opportunities to move, as the news flow has been steady. For instance, the European Central Bank announced its latest policy decision this morning. The market response was muted, however, as the ECB left rates and the stimulus program unchanged and ECB President Mario Draghi struck a dovish tone in his post-decision press conference. The euro slid in reaction to Mr. Draghi's remarks, but retraced that decline to end higher by 0.3% against the dollar at 1.0660.
Economic data also had its chance to move the market, but a better than expected Housing Starts report (1226K; Briefing.com consensus 1193K) could not prevent homebuilders from retreating. The iShares Dow Jones US Home Construction ETF (ITB 27.63, -0.32) lost 1.1%. Separately, initial claims and the Philadelphia Fed survey were met with a muted reaction.
Conversely, corporate news did have some market-moving impact, pushing the industrial sector (+0.6%) atop of the day's leaderboard. Railroads traded up after Union Pacific (UNP 106.24, +2.47) reported above-consensus earnings and Canadian Pacific (CP 150.31, +5.09) CEO Hunter Harrison left the company to pursue changes at CSX (CSX 45.51, +8.63). Shares of CSX spiked 23.4% after The Wall Street Journal reported Mr. Harrison will partner up with activist investor Paul Hilal.
At the opposite end of today's leaderboard were utilities (-0.9%) and real estate (-1.0%), suffering from an uptick in Treasury yields. Treasuries were in negative territory for the entire session, but the benchmark 10-yr yield retreated from its high by the close, ending higher by four basis points at 2.47%.
Energy (-0.7%) finished only slightly better, ignoring crude oil's modest gain. The commodity finished up 0.5% at $51.27/bbl despite the Energy Information Administration reporting that crude oil inventories had a build of 2.3 million barrels while the consensus called for a draw of 0.342 million barrels.
The top-weighted technology sector (-0.3%) also finished in the red, but ahead of the broader market. Consumer discretionary finished in a similar spot (-0.3%) despite an uptick from its largest component, Amazon (AMZN 809.04, +1.56). The sector was pulled down by retailers who sent the SPDR S&P 500 Retail ETF (XRT 43.52, -0.80) lower by 1.8% on continued weakness following disappointing holiday sales.
Today's economic data included Initial Claims, Housing Starts, and Philadelphia Fed Survey:
- The latest weekly initial jobless claims count totaled 234,000 while the consensus expected a reading of 252,000. Today's tally was below the revised prior week count of 249,000 (from 247,000). As for continuing claims, they declined to 2.046 million from the revised count of 2.093 million (from 2.087 million).
- The key takeaway from the report is that it will drive heightened expectations for nonfarm payroll growth in January as this claims report covers the period in which the household and establishment survey for the Employment Situation report are conducted.
- Housing starts increased to a seasonally adjusted annualized rate of 1.226 million units in December, up from a revised 1.102 million units in November (from 1.09 million). The consensus expected starts to increase to 1.193 million units. Building permits decreased to a seasonally adjusted 1.210 million in December from an upwardly revised 1.212 million (from 1.201 million) for November. The consensus expected a reading of 1.217 million.
- The key takeaway from the report is that residential construction will be computed as a positive input in Q4 GDP forecasts as the fourth quarter average for privately-owned housing units under construction was 1.8% above the third quarter average.
- The Philadelphia Fed Survey for January rose to 23.6 from a revised 19.7 (from 21.5) while economists polled by had expected a reading of 15.3.
- The key takeaway from the report is that it's a first quarter number and it suggests manufacturing activity in the Philadelphia Fed region expanded at an encouraging pace to begin the year.
Investors will not receive any economic data on Friday, allowing them to focus their attention on President-elect Trump's Inauguration at 12:00 ET.
- Russell 2000 -0.8% YTD
- Dow Jones Industrial Average -0.2% YTD
- S&P 500 +1.1% YTD
- Nasdaq Composite +3.0% YTD
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American Express misses by $0.08, reports revs in-line; guides FY17 EPS above consensus
- Reports Q4 (Dec) earnings of $0.91 per share, $0.08 worse than the Capital IQ Consensus of $0.99; revenues fell 4.4% year/year to $8.02 bln vs the $7.99 bln Capital IQ Consensus.
- The company's return on average equity (ROE) was 26.0 percent, up from 24.0 percent a year ago.
- Consolidated provisions for losses were $625 million, up 9 percent from $572 million a year ago, primarily reflecting higher loan growth.
- Consolidated expenses were $6.2 billion, down 2 percent from $6.4 billion a year ago. The prior year included an impairment and restructuring charge of $419 million ($335 million after-tax) as well as Costco-related rewards costs. The current quarter reflected substantially higher levels of investment spending on growth initiatives and a $50 million ($32 million after-tax) restructuring charge mentioned above.
- Co issues upside guidance for FY17, sees EPS of $5.60-5.80 (Prior guidance was at least $5.60), excluding non-recurring items, vs. $5.59 Capital IQ Consensus Estimate.
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IBM beats by $0.13, reports revs in-line; guides FY17 EPS just above consensus
- Reports Q4 (Dec) earnings of $5.01 per share, excluding non-recurring items, $0.13 better than the Capital IQ Consensus of $4.88; revenues fell 1.3% year/year to $21.77 bln vs the $21.63 bln Capital IQ Consensus.
- Cognitive Solutions (includes solutions software and transaction processing software) -- revenues of $5.3 bln, up 1.4% (up 2.2% adjusting for currency) were driven by growth in cloud, analytics and security.
- Global Business Services (includes consulting, global process services and application management) -- revenues of $4.1 bln, down 4.1% (down 3.6% adjusting for currency).
- Technology Services & Cloud Platforms (includes infrastructure services, technical support services and integration software) -- revenues of $9.3 bln, up 1.7% (up 2.4% adjusting for currency). Growth was driven by strong hybrid cloud services, analytics and security performance.
- Systems (includes systems hardware and operating systems software) -- revenues of $2.5 bln, down 12.5% (down 12.1% adjusting for currency). Gross profit margins improved driven by z Systems performance.
- Fourth-quarter cloud revenues increased 33%. The annual exit run rate for cloud as-a-service revenue increased to $8.6 bln from $5.3 bln at year-end 2015. Revenues from analytics increased 9%. Revenues from mobile increased 16% (up 17% adjusting for currency) and revenues from security increased 7% (up 8% adjusting for currency).
- Co issues upside guidance for FY17, sees EPS of at least $13.80, excluding non-recurring items, vs. $13.74 Capital IQ Consensus Estimate.
- "In 2016, our strategic imperatives grew to represent more than 40 percent of our total revenue and we have established ourselves as the industry's leading cognitive solutions and cloud platform company," said Ginni Rometty, IBM chairman, president and chief executive officer. "IBM Watson is the world's leading AI platform for business, and emerging solutions such as IBM Blockchain are enabling new levels of trust in transactions of every kind."
Mnuchin adds to mixed signals over Trump dollar policy
Treasury secretary nominee faces Senate grilling on his finances and banking record
Donald Trump’s nominee for Treasury secretary has reasserted US support for a strong dollar, adding to conflicting signals over the incoming administration’s economic policy as he sought to clarify comments by the president-elect that hit the currency earlier this week.
Steven Mnuchin, a former Goldman Sachs banker, told a Senate confirmation hearing on Thursday that a strong currency remained important over the long-term, reflecting America’s attractions as an investment destination.
On Monday Mr Trump appeared to break from decades of strong-dollar policy in the US by saying that the level of the currency was too high and was preventing American companies from competing with Chinese counterparts.
Mr Trump’s observation had not been meant as “a long-term comment”, Mr Mnuchin said, but instead reflected some potential concerns about the short-term effects of a strong dollar, including the risk of it having a negative impact on trade.
Asked about the dollar, Mr Mnuchin said “the long-term strength over long periods of time is important. And again, I believe that’s a reflection of, I believe, we have the most attractive investment environment in the world. We have to protect our US companies so they’re not forced abroad.”
Speaking before the Senate Finance Committee, Mr Mnuchin said he would not be commenting about short-term currency movements as Treasury secretary. But the mixed signals being sent by the Trump camp highlight the risks of the president-elect confusing markets with his freewheeling style, as well as uncertainty over the new administration’s economic priorities.
Mr Mnuchin was speaking in a fractious confirmation hearing that focused on his own finances as well as the lending practices of a bank he formerly chaired.
The nominee has come under fire from Democrats for his background in banking as they seek to portray him as being out of touch with ordinary Americans and callous in his dealings with struggling mortgage borrowers.
Democratic Senate staff circulated a memo before the hearing showing gaps in Mr Mnuchin’s financial disclosures. According to the memo, obtained by the FT, these included positions as director of Dune Capital International Ltd, a Cayman Islands entity, other shell companies, nearly $100m of real estate and over $900,000 worth of artwork held by his children.
Senator Robert Menendez of New Jersey said it did not take “a rocket scientist” to get the disclosure forms right and argued that by moving entities to tax havens Mr Mnuchin had helped people and organisations avoid taxes. Mr Mnuchin said the late disclosures had been an oversight and stressed the complexity of the forms he had filled in.
Mr Mnuchin defended the location of some of his vehicles in tax havens, saying he did not use the venues to avoid personal tax and that it was primarily to accommodate pension funds and non-profit institutions. Challenged by Democratic senators about the use of such havens, Mr Mnuchin said he would support changes to tax laws to make sure they are simpler and more effective.
In recent weeks Mr Mnuchin has come under repeated attack from Democrats and progressive activist groups over foreclosure practices at OneWest, the bank he used to chair.
Commenting on his record as chairman of OneWest, he told the Senate finance committee that he had been maligned and that the bank had extended 100,000 loan modifications to help borrowers who fell behind on their loans.
However Ron Wyden, the ranking member of the Senate finance committee, said the former Goldman banker had shown an “impressive capacity to advantage himself while others fell behind”.
That argument was challenged not only by Mr Mnuchin but by committee chairman Orrin Hatch, a Utah Republican, who said the bank had received “high marks” in independent evaluations as he attacked Democrats for seeking to stall confirmations of Mr Trump’s nominees.
Mr Mnuchin and a group of investors bought the lender, then called IndyMac, in 2008, turning it around. He argued his group was not responsible for creating the risky loans in the IndyMac portfolios. “In the press it has been said that I ran a ‘foreclosure machine’. This is not true. On the contrary, I was committed to loan modifications intended to stop foreclosures,” he said. “I ran a ‘Loan Modification Machine’.”
Mr Mnuchin spent 17 years at Goldman Sachs before launching new ventures in fund management and film finance. Mr Trump has turned to a series of Goldman alumni to fill senior posts in his administration, despite his attacks on Wall Street during the campaign.
Mr Mnuchin, who followed his father into Goldman Sachs, said he started on a folding chair in the bank’s mortgage department before working his way up the ranks amid “many sleepless nights”.
Mr Wyden painted Mr Mnuchin as one of the powerful and well-connected as he criticised the nominee’s hedge fund for setting up outposts in Anguilla and the Cayman Islands — “an action that can be explained only by the islands’ zero per cent tax rate”.
He went on to attack Mr Trump’s reform platform as a vehicle to offer tax breaks for the wealthy. “Campaign promises about fixing the tax system were just an elaborate head fake,” he said. Mr Wyden also questioned assurances by Mr Mnuchin that any reductions in upper income taxes under the plan would be offset by lower deductions, meaning no absolute tax cuts for the upper class.
Mr Mnuchin said in his opening statement that he had “great empathy” for the millions of Americans who lost their homes in the financial crisis and pledged to limit regulations, cut taxes on “hardworking Americans and small businesses”, and lift growth.
Mr Mnuchin’s confirmation hearing opened on a sour note, with Pat Roberts, a Republican from Kansas, telling Mr Wyden that he might want to take a “Valium pill” before continuing with his questioning. The comment prompted an angry response from Democrats.
U.S. Treasury nominee Mnuchin hammered over offshore tax havens
U.S. Treasury Secretary nominee Steven Mnuchin said on Thursday he would work to eliminate the need for offshore tax havens, as Democratic senators accused the Wall Street veteran of using such vehicles to shelter hedge fund money from the government.
In a confirmation hearing before the Senate Finance Committee, President-elect Donald Trump's pick to lead the Treasury was attacked for failing to promptly disclose he was a director of an offshore business vehicle domiciled in the Cayman Islands and owned more than $100 million in real estate.
Offshore tax havens used to shield income have become a symbol of the growing divide between rich and average Americans. Democrats seized on the disclosures, made late on Wednesday, to question Mnuchin's qualifications to revamp the tax code.
"One does not go and create offshore entities at the end of the day other than to avoid, in some form or fashion, the tax laws of the United States. That's pretty simple," New Jersey Democratic Senator Robert Menendez said.
"We have to decide whether that's necessarily the essence of what we want as leadership," Menendez said.
Mnuchin, a former Goldman Sachs executive, hedge fund manager and Hollywood film financier, said he moved his Dune Capital Partners LLC registry to the Caymans to allow for some pension fund clients to invest in his funds, not to avoid taxes.
But Mnuchin, 54, added that it "makes no sense" for the U.S. tax code to encourage the use of such entities. "In the hedge fund world these are only set up to make the accountants rich and I would love to work with the IRS to close these tax issues that make no sense."
Among the incoming Trump administration's top economic priorities is a massive tax reform effort aimed at lowering rates for businesses and individuals and closing many deductions and credits.
Mnuchin, who insisted his last-minute disclosures were not intentional but due to the complexity of his holdings, complicated federal forms and a lawyer's advice that the real estate disclosure was not required, also tried to clarify Trump's recent market-moving comments on the U.S. dollar.
The Republican businessman-turned politician, who will be sworn in on Friday, said in an interview published this week in the Wall Street Journal that the dollar's strength was "killing us," prompting the greenback to fall and gold prices to jump.
Mnuchin said he believed that Trump's remarks, which usurped a role normally reserved for Treasury secretaries, referred to a short-term spike in the dollar due to market factors, not its longer-term value.
"The long-term strength over long periods of time is important" for the dollar, Mnuchin said.
He also said he would like to see an increase in the U.S. government's debt ceiling "sooner rather than later" to avoid another standoff with Congress that could upset financial markets.
The current debt ceiling extension expires on March 15, but the Treasury would not likely exhaust its borrowing capacity for several more months after that.
Democrats had gone into Mnuchin's hearing perceiving him as one of the more vulnerable Trump nominees, partly due to his involvement with OneWest Bank, which he ran in the aftermath of the 2007-2009 financial crisis.
They hammered him for the 36,000 foreclosures that the bank pursued after Mnuchin struck a lucrative deal with the Federal Deposit Insurance Corp to absorb most of the losses from such actions.
Critics have described OneWest as a 'foreclosure machine' and Senator Ron Wyden, the committee's top Democrat, criticized the bank's automated "robo-signing" of foreclosure documents and foreclosing on the widows of reverse mortgage holders.
Mnuchin argued that his bank was a "loan modification machine," offering payment reductions to 101,000 borrowers to try to keep them in their homes, and said his turnaround of the failed IndyMac bank, which became OneWest, saved thousands of jobs and homes.
Mexico faces 50-50 risk of downgrade, Moody’s warns
Mexico was doing so well.
After being put on notice for a possible downgrade by Moody’s Investors Service last year amid concerns over its fiscal accounts and the health of financially troubled state energy company Pemex, the government made progress reining in spending and overhauling the oil giant and the ratings agency was seeing a brighter picture.
But with Donald Trump about to take office in the US, Mexico is not out of the woods – indeed, there’s about as much chance at the moment of a downgrade as there is of the status quo.
“The balance of risks at the moment continues to be balanced. We think there’s as much probability that Mexico can revert the negative outlook as that we downgrade – it depends on what happens … and how effective Mexico’s response is,” Jaime Reusche, Moody’s analyst for Mexico, told reporters on a conference call.
Given the “unchartered territory” ahead for Mexico if Mr Trump follows through on his threats – which include slapping “big” border taxes on companies manufacturing in Mexico and exporting to the US, renegotiating the North American Free Trade Agreement and barricading the border with a wall – Mexico faces a tough path to an upgrade.
“We’d have to see the process of fiscal consolidation being maintained all year and debt stabilising,” Mr Reusche said. He noted that weak political institutions – a polite way of alluding to Mexico’s large corruption problems – were a drag on the country’s sovereign rating. Mexico is currently rated by Moody’s at A3 with a negative outlook, and the agency expects to take a decision on whether to alter that outlook in the coming year.
Going into 2017 – without the Trump factor – Mr Reusche said Mexico’s financial authorities had proved their commitment to sound fiscal management. “What has changed is the nature of the risks. We’re in unchartered territory,” he said.
He expected a lot more volatility ahead for internal flows, investment and the peso currency – which again breached 22 to the dollar on Thursday, on the eve of the Trump inauguration.