Closing Market Summary: Nasdaq Notches New High as Fed Statement Boosts MarketThe stock market ended the Thursday affair on a higher note as participants continued to mull over yesterday's policy decision and guidance from the Federal Reserve. The broader market maintained its risk-on posture for a second session as the Nasdaq Composite (+0.8%) finished ahead of both the S&P 500 (+0.7%) and the Dow Jones Industrial Average (+0.5%).
The Federal Reserve sparked a risk rally in global markets after voting to leave the target range of the fed funds rate unchanged (0.25% to 0.50%) at yesterday's policy meeting. Investors shook off persisting concerns regarding a potential September rate hike and also adjusted their rate hike expectations for the years ahead. The FOMC lowered its median projections for the fed funds rate to 0.6% for 2016, 1.1% for 2017, and 1.9% for 2018.
It is also worth noting that the committee reported that the case tightening has strengthened in recent months as three members supported a hike at yesterday's meeting. This leaves the door open for a potential rate hike before the end of the year. The implied probability of a rate hike at the December meeting registers at 58.4% after beginning the week at 55.0%.
The benchmark index notched a session high in the opening hour of trade, testing but failing to clear technical resistance near the 2180 price level. The broader market pulled back shortly thereafter as market leadership shifted away from commodity-sensitive energy (+0.2%) and materials (+0.3%) and towards defensively-oriented consumer staples (+0.9%), telecom services (+1.1%), and real estate (+1.9%). This also corresponded with a slight recovery in the U.S. Dollar Index (95.41, -0.25, -0.27%). Dollar-denominated commodities finished mostly higher with WTI crude ending up 2.2% ($46.33/bbl; +$0.99) on the day.
The broader market finished in the upper end of today's trading range as all eleven sectors settled in the green. The heavily-weighted industrial (+0.8%), consumer discretionary (+0.8%), and health care (+0.8%) sectors finished behind consumer staples (+0.9%), telecom services (+1.1%), and real estate (+1.9%). On the flipside, the financial sector (+0.3%) rounded out the leaderboard.
The consumer discretionary space (+0.8%) finished ahead of the broader market as heavily-weighted Amazon (AMZN 804.70, +14.96) displayed relative strength. The name jumped 1.9% after being upgraded to "Buy" from "Hold" at Argus. Meanwhile, Carnival (CCL 46.84, +1.02) and Royal Caribbean (RCL 70.99, +3.13) outperformed after the European Commission proposed a Political Dialogue and Cooperation Agreement with Cuba. Recall that Carnival opened new routes to Cuba earlier in the year.
In the health care space (+0.8%), Mylan Labs (MYL 42.59, +0.68) rallied 1.6% after CEO Heather Bresch testified before the House Oversight and Government Reform Committee yesterday. Ms. Bresch addressed the ongoing controversy regarding Mylan's EpiPen pricing. Mylan has gained 0.5% in September after falling 9.5% in the prior month. The broader iShares Nasdaq Biotechnology ETF (IBB 300.08, +2.55) finished slightly ahead of the health care sector, ticking higher by 0.9%.
The financial sector (+0.3%) underperformed as investors eyed a downturn in long term Treasury yields and diminished rate hike expectations. Wells Fargo (WFC 45.72, -0.11) declined 0.2% after a group of U.S. Senators asked the Labor Department to investigate the bank. Wells Fargo has lost 10.0% in September amid ongoing concerns over prior sales practices. Conversely, the real estate sector (+1.9%) outperforms as rate-sensitive real estate investment trusts have displayed relative strength so far this month.
Treasuries ended on a mixed note with the long end of the curve outperforming. The yield on the 2-yr note finished flat (0.77%) while the yield on the 10-yr note declined three basis points (1.62%).
Today's participation was roughly in-line with the recent average as more than 833 million shares changed hands on the NYSE floor.
Today's economic data included weekly initial claims, the FHFA Housing Price Index for July, Existing Home Sales for August, and Leading Indicators for August:
- Initial jobless claims for the week ending September 17 decreased by 8,000 to 252,000 (consensus 262,000).
- Continuing claims for the week ending September 10 decreased by 36,000 to 2.113 million.
- The FHFA Housing Price Index for July rose 0.5%, which followed an increase of 0.2% in June.
- Existing home sales decreased 0.9% month-over-month in August to a seasonally adjusted annual rate of 5.33 million (consensus 5.50 million), up 0.8% from last year.
- Existing home sales in July were revised down to 5.38 million from 5.39 million.
- The Conference Board's Leading Economic Index declined 0.2% in August (consensus +0.1%) on the back of an upwardly revised 0.5% increase (from 0.4%) for July.
- This was the second time over the last four months that the index has been negative.
There is no economic data scheduled to be released tomorrow.
- Russell 2000: +11.2% YTD
- Nasdaq Composite: +6.6% YTD
- S&P 500: +6.5% YTD
- Dow Jones: +5.6% YTD
Who is in charge of Brexit? ‘It’s all very difficult,’ says Hammond
A turf war in government is unsettling businesses, which are unsure of how the UK’s negotiating strategy for Brexit will develop.
When asked this week who was in charge of Brexit, Philip Hammond, the chancellor, demurred, according to a businessman, saying that it is “all very difficult at the moment”.
Mr Hammond, prime minister Theresa May, Brexit minister David Davis and Liam Fox, and the international trade minister have all, along with the business department, summoned executives to meetings since June to get a feel for the priorities of the private sector in the forthcoming negotiations with Brussels.
One participant, who had taken part in meetings with three different government departments since July, said he was growing weary of repeating the same list of negotiating priorities to different ministers and departments.
Another said that while Mr Hammond was adopting a cautious, evidence-based approach to future business links with the EU, pro-Brexit ministers were eager to make a clean break with the single market and customs union.
“There are two significant strands of thinking in government,” said one person who had attended the Whitehall meetings. “One strand is gung-ho and wants to drive on without fully understanding the consequences, the other is more measured.”
The chancellor’s aides said they “did not recognise” the comment from Mr Hammond that it was “difficult” to pin down who was in charge of Brexit.
Participants at a meeting with Mr Hammond on Wednesday said that, after the chancellor had left the room, the main topic of conversation had been the lack of a single point of contact in government to which business could represent its views.
Carolyn Fairbairn, CBI director-general, is ringing round business leaders to marshal support for a formal request for the establishment of clearer lines of communication with government.
Ms Fairbairn said: “A clear roadmap and architecture should be built so firms know who to engage with over what timeframe.”
The CBI and several of the business leaders who met with Mr Hammond on Wednesday believe the Treasury to be the most obvious choice for such a single point of contact
Mr Hammond had asked those at their meeting for their views both on the priorities for a post-Brexit settlement as well as suggestions for how the government could create more confidence in the economy.
One said that business demands essentially boiled down to access to the single market “without any of the bad bits”, in effect a retention of financial services’ passporting rights, intellectual property protection and access to the single market — but with no interference from the EU on issues such as pay.
“This [government] could spell out a new era for relations between business and government, a new ‘grand bargain’,” he said. “But if our goodwill is abused, or our views misrepresented, that goodwill could be very quickly used up.”
Another participant at the meeting with Mr Hammond and Treasury officials said that the most obvious interlocutor for business with government over Brexit was the Treasury.
One government insider said there was not a lack of “joined-up government” and it made sense for all relevant government departments to meet business, since each had their own specific role in the complex EU negotiation. It was impractical to have all ministers and all business leaders in the room at any given time; the government machine would ensure that the separate talks were all co-ordinated centrally.
Mr Hammond and Treasury colleagues held four meetings with business representatives this week in advance of his Autumn Statement on November 23.
Participants included the heads of business lobby groups such as the CBI and the Federation of Small Businesses, as well as chief executives and chairmen of companies such as John Lewis, British Airways, Rolls-Royce and BlackRock.
After the meetings, Mr Hammond said: “We have an opportunity to forge a new role for ourselves in the world, to negotiate our own trade deals and be a positive and powerful force for free trade and it is crucial that government and business work together to make it happen.”
important to watch how S&P is going to trade after this move to fill the gap...could see a reversal. I will be very cautious and watch close and move tomorrow... worst will be close around here and open with a lower gap tomorrow.
EXCLUSIVE-Regulators expect Monte dei Paschi to ask Italy for help - sources - Reuters News
22-Sep-2016 16:02:28
- Tuscan lender aims to raise 5 billion euros
- Regulators fear capital raising could fall short
- State aid raises thorny debate on bondholder losses
By John O'Donnell
LONDON Sept 22 (Reuters) - European regulators expect Italian bank Monte dei Paschi di Siena will have to turn to the government for support, three euro zone officials with knowledge of the matter said, although Rome would strongly resist such a move if bondholders suffered losses.
Less than two months after the Tuscan lender announced an emergency plan to raise 5 billion euros of fresh capital, having come last in a health check of 51 European banks, there is growing concern among European regulators that the cash bid will fall short.
While the bank is determined to see through the capital raising, if it were to disappoint, it would be left with a capital hole. Now euro zone authorities are considering whether state support would have to be tapped after what bankers have described as slack interest in the bank's share offer.
"There is clearly an execution risk to the capital raising," said one official with knowledge of the rescue attempt, adding that the bank's value, about one ninth the size of the planned 5 billion euro cash call, would be a turn-off for investors.
That person said a "precautionary recapitalisation by the Italian state" could be used to make up any shortfall once attempts to raise fresh cash from investors had concluded in the coming months.
Monte dei Paschi declined to comment. The Italian treasury did not want to comment for this story. A spokesman for Prime Minister Matteo Renzi said he was not aware of any expectations among European regulators that Monte dei Paschi may turn to the state for help.
Monte dei Paschi faces a considerable challenge in convincing investors to back its third recapitalisation in as many years. Further complicating the picture, a constitutional referendum, expected to be held by early December that could decide the future of Renzi, is likely to push the bank's fund-raising into next year, the officials say.
The bank's fragile state poses a threat to confidence in other Italian lenders and even to heavily-indebted Italy, the euro zone's third-largest economy.
Renzi and his economy minister, Pier Carlo Padoan, have said in recent days Monte dei Paschi's capital raising will be successful. Sources close to the consortium of banks that have made a preliminary commitment to underwrite the 5 billion euro privately-backed cash call dismissed suggestions it may fall short as "nonsense."
Reopening the question of state support, which had already been explored and dropped because of the losses it requires for bondholders under European bank crisis rules, is politically charged, and would reignite a dispute between Italy and Germany.
Berlin had objected to Rome's efforts to back the struggling bank without imposing a loss on its bondholders, according to another senior official.
But while some in the German government argue that Italian savers are wealthy enough to shoulder the bank's problems, Rome wants to spare both institutional investors and ordinary Italians who have tied up their money in its bonds at all costs.
Renzi's government fears that hitting bondholders would be extremely unpopular and could trigger a wider confidence crisis in the Italian banking system.
Those tensions were visible recently when Renzi took a public swipe at Germany, telling its central bank chief Jens Weidmann to fix the problems of its own banks which he said had "hundreds and hundreds and hundreds of billions of euros of derivatives".
STRICT TERMS
As regulators, the European Central Bank, the European Banking Authority and the European Commission, are involved in the debate.
The European Union's executive has responsibility for enforcing rules to stop countries giving local companies an unfair advantage through state aid.
On Thursday, the Italian head of the European Banking Authority Andrea Enria told a newspaper, when asked about Monte dei Paschi, that, while he could not comment on individual banks, "if state aid could be part of the solution, let's use it."
While Enria has no direct say in the process, his comments chime with ECB President Mario Draghi's public backing in July for a state-sponsored backstop in helping Italian banks sell down some of their bad loans.
The ECB is influential as banking supervisor but whether any such step would be taken by Italy depends on the terms imposed by the European Commission.
A "precautionary recapitalization" of Monte dei Paschi would allow Rome to inject public funds, under certain conditions, without imposing steep losses on all of the bank's bondholders, as would normally be required by the EU.
The rules, however, are vague and there would still be room for argument on this point.
"It is certainly one of the options ... on the table," said one official familiar with thinking at the European Commission, referring to such state-backed recapitalisation. "Their (Italy's) preferred option is to find private investors."
That regime of recapitalisation, enshrined in European Union law, requires the bank to first convert some of its debt into shares, according to people familiar with the matter. The debt conversion is a step that Monte dei Paschi is considering as part of its own plan, although on a voluntary basis.
A spokeswoman for the European Commissioner in charge of state aid cases, Margrethe Vestager, said that it had "taken note" of the bank's "plans to launch a private capital raising exercise."