Reuters : Deutsche Bank sees world economy, investment reversing for the next 35

Deutsche Bank sees world economy, investment reversing for the next 35 years

Global economic growth will be so slow over the next 35 years that policymakers will struggle to meet the significant economic, social and political challenges that results, Deutsche Bank said on Friday.

And unlike the past 35 years, inflation and bond yields will rise over the next three decades, said the report, which was cited by bond traders on Friday as a reason for a selloff in fixed income markets that pushed bond yields up to levels not seen for months. Stock markets around the world also fell.

The detailed annual study from one of the world's biggest banks argued that all the conditions underlying the previous 35 years of rising global growth and prosperity are fading.

"We're about to see a reshaping of the world order that has dictated economics, politics, policy and asset prices from around 1980 to the present day," Deutsche's report said.

"Given that this current cycle has lasted around 35 years, it's possible that the next cycle ... will also last many decades. Extrapolation of the last 35 years could be the most dangerous mistake made by investors, politicians and central bankers," it said.

It said asset valuations in major developed countries have never been higher, for reasons unique to the 1980-present day period.

The 10-year U.S. Treasury yield, effectively the global benchmark interest rate, leapt to 1.67 percent, its highest since Britain voted on June 23 to leave the European Union.

Germany's 10-year yield rose sharply too, popping above zero for the first time since the Brexit vote. Wall Street slid more than 1 percent, also the biggest decline since June.

According to Deutsche, common themes over the next 35 years will include: lower real growth, higher inflation, less international trade, more controlled migration, lower corporate profits as a share of gross domestic product and negative real returns in bonds.

Barron's : Growing Irish Sandwich Giant’s Tasty Shares

Growing Irish Sandwich Giant’s Tasty Shares

Greencore supplies U.K. supermarkets with convenience foods. As it works out hiccups in its U.S. expansion, its stock should take off.

Greencore’s products are aimed at consumers seeking good-value, convenient, fresh, and healthy foods. Photo: Greencore Group/Steve Baxter
Dow Jones Global Indexes|Global Stock Markets

Greencore Group, the Irish company that bills itself as the world’s largest sandwich maker, could help to satisfy investors’ hunger for profits.

Its London-listed shares (ticker: GNC.UK) could add more than 20% in the next year as the Dublin-based company begins to reap the rewards of expansion in the fast-growing U.S. market and continues to strengthen its position in the United Kingdom.

The stock, which closed on Friday at 3.50 pounds ($4.65), has dropped 1% in 2016, although it is ahead 18% in the past 12 months and has more than doubled in value over the past three years. It also trades in New York via American depositary receipts under the ticker GNCGY, with each ADR equivalent to four ordinary shares. They traded on Friday at $19.05.

At the current price, Greencore has a market value of £1.44 billion and trades for 16.1 times estimated earnings for 2017. In contrast, the Stoxx Europe 600 index’s consumer-goods sector trades at a multiple of 21.6.

The company is the U.K. market leader in manufacturing ambient, or chilled, convenience and private-label foods. Its products range from sandwiches and filled baguettes and wraps to salads and sushi, chilled ready meals, desserts, and cakes. All of the U.K.’s major supermarkets are customers.

Greencore’s products are aimed at consumers seeking good-value, convenient, fresh, and healthy foods to suit busy lifestyles. The market for convenience foods is growing at a double-digit pace, while supermarket sales are little more than flat.

“Anytime a company can provide a cost saving for someone, those sales are much easier to make,” says Bernard R. Horn Jr., president and portfolio manager at Polaris Capital Management in Boston, which owns Greencore shares. He sees 20% to 30% upside in the stock. “We think it is an interesting deflationary story,” Horn says.

Analysts at Berenberg have a 12-month price target for Greencore at £4.40—pointing to a potential upside of 26%—based on an average of depreciated cash flow and peer multiples. “We believe Greencore offers some of the best visibility in our sector,” they note.

GREENCORE WAS BORN out of the 1991 privatization of Irish Sugar. It diversified into convenience foods in 2001 and exited the sugar business in 2006. Last year, it reported net income of £58 million, or 18 pence per share, on revenue of £1.34 billion.

The company’s recent performance looks unimpressive because it has cranked up capital expenditure to fund its expansion in the U.S., where it supplies convenience foods to Starbucks (SBUX) and 7-Eleven stores. The U.S. accounts for only about 15% of sales from the convenience division, but Greencore is adding capacity that could help drive growth.

However, the expansion hasn’t been without hiccups. For instance, a new facility in Rhode Island encountered higher-than-expected levels of employee turnover, and materials waste. Costs also increased, contributing to a “modest” operating loss in the U.S. business in the fiscal year ended on Sept. 25, 2015.

A few more wrinkles need to be smoothed out, but the U.S. potential remains huge. U.S. sales ran about $300 million last year and could swell to $1 billion by 2024 if Greencore can leverage its new facilities and win new accounts.

GREENCORE’S U.K. SALES in the food-to-go category could continue to grow at a double-digit pace for the next few years. It already has good visibility. Most of its customers are on contracts for three to five years, but Marks & Spencer Group (MKS.UK), its biggest customer, is on a seven-year deal. Greencore has proved to be a reliable partner for quality, service, and innovation.

The company’s ability to innovate could help it land a contract to supply a coffee chain in the U.K., such as Starbucks. That could secure as much as £200 million a year in additional revenues.

Greencore is forecast to earn net income of £72 million, or 19 pence a share, on revenue of £1.45 billion in fiscal 2016. Next year, it could earn £83 million in net income, or 21 pence a share, on sales of £1.59 billion.

Its balance sheet is healthy, although net debt is projected to climb to £317 million at the end of the current fiscal year from £273 million a year earlier, mostly from capital expenditures on the new facilities in the U.S. Debt could come in a little higher than expected following the drop in the value of the pound over the summer, but at 2.4 times estimated earnings before interest, tax, depreciation, and amortization, the level is manageable.

The stock offers a dividend of 1.8%, which is growing in line with earnings. It could yield 2.4% in 2018, making Greencore even more palatable.

Barron's : Electric Cars Will Power BorgWarner Higher

Electric Cars Will Power BorgWarner Higher

BorgWarner’s components for hybrids and electric cars are growing at a 50% annual clip. Shares could rise 30%.

Auto supplier BorgWarner wants investors to know two things about electric cars. First, even without internal-combustion engines, they will still need specialized motors, transmissions, cabin heaters, and other BorgWarner wares. Second, they aren’t going to become commonplace anytime soon.

Eight years from now, pure electrics will make up between 2% and 3% of light-vehicle unit sales, predicts market researcher IHS Markit—a view that BorgWarner (ticker: BWA) backs, based on talks with car makers. Some 17% of cars will be hybrids, and for safety and cost reasons, they will mostly be what the industry calls mild hybrids, which save on fuel and emissions, but maintain a leading role for internal-combustion engines. The rest of light vehicles will be traditional gas guzzlers, or rather, gas sippers, with ever-smaller engines tweaked with power-boosting turbo systems and mileage-stretching features that, for example, shut off the engine at stop lights.

“We’re a propulsion company, not just a powertrain company,” CEO James Verrier told Barron’s Wednesday, after hosting an investor conference. “Powertrain” refers collectively to car components like the engine and transmission, which generate and transmit power. The term is sometimes applied to electric cars, but Verrier wants to make clear that however tomorrow’s cars are powered, BorgWarner will play a role. It’s important that he make that case, because shares that fetched over $60 two years ago now go for $34.14, having fallen on fears that an earnings decline last year was the beginning of the rise of electrics and the end for powertrain players. In fact, it was due to unrelated factors—more on those in a moment.


Earnings per share this year are expected to rebound to their 2014 level, which, in light of the stock’s decline, means that shares that sold for 19 times earnings then now go for just 11 times. Over the next few years, BorgWarner is expected to grow earnings per share at a double-digit pace. Barron’s made an ill-timed call early last year, recommending the stock at $55 (“BorgWarner Shares Could Roar Higher,” Jan. 3, 2015). But the current price looks unreasonably low. As investors regain confidence, expect the shares to rise more than 30% in the next year. The stock yields 1.5%.

LAST YEAR, BORGWARNER reported sales of just over $8 billion, a 3% decline, and profit of $646 million, down 6%, after a string of cuts to guidance. Two things that didn’t cause the decline were Volkswagen’s (VOW3.Germany) emissions-test cheating scandal and demand for electric cars, which are still much less than 1% of unit light-vehicle sales. One factor was a tumble in the euro, which made BorgWarner’s sales to turbo-happy European car makers less valuable in dollar terms. A second was weak demand for industrial vehicles. A third was a slowdown in China’s car market.

Long-term growth prospects remain bright, driven by the push for more efficiency from components like turbochargers, which blow extra oxygen into engine cylinders to make fuel burn more efficiently. The result is plenty of acceleration. They’re powered by exhaust, so for car makers looking to boost mileage without sacrificing power, they’re like getting something for nothing—except $250 or so paid to BorgWarner. Analysts expect turbos to spread to more cars in coming years.

As engines grow smaller, BorgWarner must continuously re-engineer its turbos to turn less exhaust into the same rush of oxygen, the way a gardener puts his thumb over the end of a hose to turn a trickle into a spray. The company reckons it can grow its average content per internal-combustion vehicle to $215 by 2023 from $185 this year, by selling more turbos and things like stop/start accumulators, which allow engines to shut off at red lights, but also let cars take off quickly on green. The upshot: BorgWarner thinks it can grow 5% a year in internal-combustion engines, even if sales of conventional vehicles gradually slow.

It can grow much faster in hybrids and electrics, albeit from a small base. BorgWarner expects today’s varied standards to converge in coming years around 48-volt, or so-called mild hybrids. That’s up from the 12-volt electrical systems in traditional cars, but well short of the hundreds of volts used in some full hybrids and electrics.

The reason: For a driver in a mishap, a 48-volt shock makes for a bad day, but a 300-volt one can make for his last day. Cars running that kind of juice need costly cabling and protective systems. BorgWarner says that mild hybrids can achieve 80% of the benefit of full hybrids at 20% of the cost. And they can use all of BorgWarner’s doo-dads for traditional engines, plus some extra ones. For example, the company’s new eBooster provides electrical support for big turbochargers on small engines, boosting efficiency and eliminating something called turbo-lag. Management predicts yearly growth for components of more than 50% from both hybrids and electrics through 2023.

What about driverless cars? They will still need powertrains…er, propulsion systems. And that’s not all. Today’s cars have redundant braking systems in the form of a panicked driver scrambling for the emergency brake. With no drivers, BorgWarner anticipates that future cars will need electrically powered stopping systems for backup.

In all, the car industry is undergoing remarkable change, but some investors have gotten ahead of themselves. Right now, Tesla Motors (TSLA) is on pace for about $8 billion in sales this year and BorgWarner, just over $9 billion. Only one has profits. Tesla has a stock market value of close to $30 billion, and BorgWarner, less than $8 billion. Root for the Silicon Valley star from afar, but back up the truck on the Detroit veteran’s shares.

Barron's : Belmond, the Luxury Hotel Chain, Has a Smart Plan for Growth

Belmond, the Luxury Hotel Chain, Has a Smart Plan for Growth

The stock, at a recent $11, offers potential for tremendous upside while the downside seems limited.

Luxury hotelier Belmond held an analyst day in New York earlier this summer at its own 21 Club restaurant, and laid out a new plan for doubling results by 2020.

The presentation, focused on Ebitda, or earnings before interest, taxes, depreciation, and amortization, was met with skepticism. The first speaker in the Q&A queue called the plan “not a whole lot different from what we heard a few years ago,” adding that it felt like “déjà vu all over again.”

Investors’ frustration might be justified, given that Belmond’s stock (ticker: BEL) hasn’t budged in almost four years, despite the company’s efforts to spur growth. The dual-class share structure gives holders of the Class A shares no say, and the board has spurned two takeover offers at significant premiums in the past 10 years. Meanwhile, top executives have come and gone in that time.

Yet the stock, at a recent $11 offers potential for tremendous upside, while the downside seems limited.

CEO Roeland Vos, appointed last September, is a 30-year industry veteran; he previously was president of European operations for Starwood Hotels & Resorts Worldwide (HOT). He is aiming for a mix of organic growth and acquisitions.

During the investor day, management announced that the board has decided to eliminate the dual-class share structure eventually. That’s the first time the board has indicated it would do so. It likely will happen only if the growth strategy is successful in the next few years.

Telsey Advisory Group analyst David Katz thinks Belmond’s new management team is credible, and the growth prospects are reasonable, but not without risks. “It’s double or nothing,” he says, noting that if management is successful, the stock could be worth $21 to $26 in five years.

If not, Katz expects the value of Belmond’s trophy properties to provide a floor for the shares. They include one-of-a-kind assets like Italy’s Hotel Cipriani, Brazil’s Copacabana Palace, Russia’s Grand Hotel Europe, and the Venice Simplon-Orient-Express railroad. If the company were ever sold, it would likely fetch a high valuation.

The two previous takeover offers, in 2007 and 2012, valued Belmond at over 17 times Ebitda. The stock is trading for 11.3 times 2017 estimated Ebitda now. Katz thinks the shares would rise 25% to 50% if the share structure was eliminated today, since it would likely put the company in play.

BELMOND OWNS in whole or part 47 properties, including luxury hotels, tourist trains, and river cruises in 23 countries. The company changed its name in 2014 from Orient-Express Hotels.

The hotels account for 85% of total revenue of $570 million, and compete with brands like St. Regis and Ritz-Carlton. Analysts look for $28 million in earnings this year, or 28 cents a share, and about the same next year. Ebitda estimates are $132 million this year, growing 5% in 2017. Same-store revenue per available room, in constant currency, could be up 3% to 7% for the year, management has guided.

The Olympics in Rio de Janeiro, and demand for its European hotels in the peak season, are expected to drive growth. Also, the market for luxury travel is healthy.

Belmond targets roughly $240 million in Ebitda by 2020, and a doubling of its properties under operation. Operating improvements to the reservation system and hotels, and better marketing, also could drive growth.

Management aims to lease or buy 15 to 20 new hotels, each with at least 50 rooms, and a handful of new trains and cruise ships. Belmond has a small hotel-management business, which it also plans to expand. With net debt under four times Ebitda, the company has financial flexibility.

Some investors note the difficulty of finding attractive deals in today’s heated market for high-end hotels. In 2014, China’s Anbang Insurance Group paid a rich $2 billion for the Waldorf Astoria.

Vos disagreed at the analysts’ day with the notion that Belmond would need to pay premium prices, saying, “We think there are opportunities out there that we can go after within reasonable price ranges...that fit into our financial targets.” He couldn’t be reached for comment.

In July, billionaire real-estate and hotel investor Barry Sternlicht, Vos’ former boss at Starwood, announced a 4.9% stake in Belmond. The stock jumped 20% on the news, and hasn’t declined much since. That’s a vote of confidence from one of the most notable hotel investors around. It also seems to support the idea that at Belmond, this time might be different.

BArron's : Vodafone’s Charms: 33% Upside and a 5.3% Yield

Vodafone’s Charms: 33% Upside and a 5.3% Yield

Coming off a network upgrade, Vodafone is poised to start minting cash. Could a merger be next?

Vodafone Group has languished amid the global search for yield over concerns about the company’s exposure to a European wireless market long plagued by highly competitive conditions and difficult regulation.

The situation, however, has begun to improve, with Vodafone generating revenue growth in Europe in recent quarters after eight years of decline. And the company gets little credit for its appealing, moderate-growth wireless operations in India, South Africa, and other developing markets, which account for about a third of total sales.

One potential catalyst would be a merger with John Malone’s Liberty Global (ticker: LBTYA), a major European cable-TV player. Vodafone said a year ago that it was no longer in talks with Liberty Global, but analysts say a deal would yield considerable strategic and financial benefits. Malone, a shareholder- focused deal maker, may be ready to act if terms can be worked out.

Vodafone’s American depositary receipts (VOD) have fallen 14%, to about $30, in the past year, badly trailing the two big U.S. telecom companies, Verizon Communications (VZ) and AT&T (T). Vodafone yields about 5.3%, above AT&T’s 4.6% and Verizon’s 4.3%. Its market value is $80 billion, about a third of AT&T’s size. The Vodafone dividend, which is paid semiannually, is generous relative to the ultralow yield on the British 10-year government bond, now at 0.85%.

THE BULL CASE on Vodafone is that it offers one of the best financial and operational stories in the European telecom sector, after investing some $28 billion in the past two years to upgrade its network. Capital spending now is moderating. The company is a top three operator in four major European wireless markets: Germany, the United Kingdom, Italy, and Spain.

Two of Vodafone’s biggest fans, JPMorgan analyst Akhil Dattani and UBS analyst Polo Tang, think its U.K.-listed shares have 33% upside—the equivalent of about $40 for the Vodafone ADRs.

Vodafone is Dattani’s top European telecom pick, with the analyst writing recently that the company offers the sector’s “highest revenue; earnings before interest, taxes, depreciation, and amortization; and free cash flow” growth in the coming years, with projected annualized growth of 2% in revenue, 5% in Ebitda, and 17% for free cash flow.

Vodafone executed one of the largest corporate divestitures ever when it sold its 45% interest in Verizon Wireless to Verizon Communications in 2014 for $130 billion in cash and stock. Vodafone capitalized on Verizon’s desire for full ownership of its wireless business to negotiate a good price. It then distributed $84 billion to shareholders.

One of the knocks on Vodafone is that it hasn’t been covering its dividend from free cash flow. But this year, the company expects to generate at least $4.5 billion in free cash—sufficient to cover its dividend—with free cash increasing from there.

With a price/earnings ratio of about 30, Vodafone’s shares look rich relative to global peers, in part due to its heavy noncash depreciation expense. The shares look more reasonable based on an enterprise value/Ebitda flow multiple of 6.5, versus about seven for Verizon and AT&T.

The European wireless market is more competitive than the U.S. market, with lower average monthly bills per user of about $30, against $50 in the U.S., and lower margins. Vodafone’s Ebitda margin of about 30% compares with 45%-plus for Verizon. The good news is that there is probably less room for conditions to worsen in Europe.

In addition, Vodafone benefits from strong growth at its 65%-owned Vodacom Group (VOD.South Africa) unit, which holds most of its African wireless business.

UBS’ Tang devoted a report this month to a potential Vodafone/Liberty Global merger, writing that it would create “a leading converged fixed-[line]/mobile operator across Europe.” The two companies already have formed a joint venture for their Netherlands operations. There is significant overlap between the two, with both having a major presence in Germany and the U.K. Fixed-line/wireless bundles are becoming popular in Europe.

Among possible stumbling blocks to a deal is price, with the smaller Liberty Global (market value: $29 billion) presumably wanting a premium. But given the 35% decline in Liberty Global’s stock price since the Vodafone talks ended and Vodafone’s improving financial outlook, Tang thinks that’s less of a deal breaker now. Also, the companies differ on shareholder returns, with Liberty Global focused on stock buybacks and Vodafone on the dividend.

VODAFONE YIELDS MORE than its biggest rival, Deutsche Telekom (DTEGY), which pays out 3.6%. As Barron’s noted last month (“5 Safe European Stocks With Yields Up to 5%,” Aug. 13), Deutsche Telekom’s low yield reflects its valuable stake in T-Mobile US (TMUS), which pays no dividend. Vodafone and its high-yielding European peers haven’t been helped by continued outflows from U.S.-based European equity mutual funds. If money starts flowing into European stocks from U.S. investors—and from European investors seeking an alternative to low or negative government bond yields—Vodafone could benefit.

With an increasingly secure dividend and an improving financial outlook, Vodafone looks like one of the best bets in the global telecom market.

Reuters - Fed's Kaplan says next U.S. president must grow workforce

Fed's Kaplan says next U.S. president must grow workforce

The next U.S. president will need to address the aging population of the workforce if he or she wants to boost U.S. economic growth, a top Federal Reserve official advised on Friday.

"The first thing the president's got to do is focus on policies to grow the workforce," Dallas Fed President Robert Kaplan told the Security Traders Association, in response to a question on the race for the White House currently underway. "That doesn't necessarily mean immigration, it could, but it could also mean vocational training."

Other areas of focus will need to include investing in infrastructure, addressing the growth of the national debt, and state and federal regulatory reform, he said.

Rhetoric in the presidential campaign so far, though, has not addressed the aging of the workforce or the growing ration of debt to U.S. GDP, both key barriers to U.S. growth, he said.

"What we are hearing on trade and immigration may be pushing the other way," Kaplan said of current campaign rhetoric.

Republican presidential candidate Donald Trump has said he would rewrite trade agreements and would mount a wall to keep out Mexican immigrants, among other policies seen as anti-immigrant. Democratic presidential candidate Hillary Clinton has also retreated from a formerly pro-free trade stance.

Kaplan's remarks on the campaign, though guarded, were unusual in that Fed officials typically avoid making any comments on politics for fear of having their own independence infringed upon by politicians.

During the financial crisis and its aftermath the Fed used low rates to fight a war against recession and deflation, he said, but now even with very low interest rates the economy is set to grow only 1.75 percent to 2 percent this year. "Now we are in a period where the war now is, we got to grow," he said.

>>> Weekly Update

Weekly Market Update: Passive ECB and Hawkish Fed Finally Jar Markets

September trade finally ushered in some volatility after the long slog higher for much of the summer. Early on in the week volumes remained light and movement remained minimal coming on the heels of a disappointing August employment report last Friday. An uptick in M&A announcements after the Labor Day holiday did little to juice equity markets. Corporate debt offerings surged as company's looked to roll over financing costs ahead of a potential Fed rate hike. US data continued to come in soft, highlighted by the August ISM Services reading that touched its lowest level since 2010. The weaker readings helped push Treasury markets higher, keeping a lid on yields through midweek.

By Wednesday traders focus turned decidedly towards Europe. With August (post-Brexit) economic readings holding up generally better than some officials admittedly had forecasted, expectations that much would come of Thursdays ECB meeting were diminished. Nevertheless, markets responded when the ECB held pat on rates and stimulus measures and Draghi was decidedly more hawkish than many had expected in his commentary. Notably Draghi said the ECB did not discuss extending its QE timeframe, even as the nominal end date is looming in March. The reverberations were felt most potently in the rates complex. Sovereign bonds sold off globally pushing benchmark rates in Europe and the US up to levels not seen since the Brexit vote. The pressure was amplified by a more hawkish tone from a slate of Fed speakers that spooked markets about the possibility the Fed could actually make its next rate move this month. Boston Fed President Rosengren said there is a reasonable case for gradual tightening, and even the usually cautious dove Governor Tarullo said he would not rule out a rate hike this year. Stock markets came under pressure and the selling accelerated into week's end. The S&P, Dow and Nasdaq Composite each fell below their 50-day moving averages on Friday for the first time since the post Brexit swoon, and the S&P500 saws its first daily move of greater than 1% for the first time in over 40 sessions. For the week, the DJIA lost 2.2%, the S&P500 dropped 2.4%, and the Nasdaq fell 2.4%.

Energy futures pushed higher for most of the week after Russia and Saudi Arabia agreed to form a working group on oil price stability and other oil producers including Iran made constructive comments about a potential oil production freeze agreement. Weekly energy inventory data also provided a boost for crude futures as the 12% of US Gulf of Mexico oil production that was shut in by tropical storm Hermine resulted in the largest weekly draw in crude since 1999.

In the realm of corporate news, the most anticipated event this week was Apple's product unveiling. CEO Cook divulged the new 'water-resistant' iPhone 7 model, which features larger hard drives, an upgraded camera, and a somewhat controversial removal of the headphone jack, but the announcement revealed few features that surprised any tech-watchers. The consumer electronics giant also introduced the Apple Watch 2, with built-in GPS, and Airpod wireless earphones. While the event disappointed some, Apple's week was considerably better than competitor Samsung's; the Korean electronics maker announced a global recall of its Galaxy Note 7 phones on reports of battery fires. M&A began to pick up from the relatively quiet pre-Labor Day holiday period. Hewlett Packard Enterprise announced it would spin off and sell its non-core software assets to Micro Focus in a deal valued at $8.8B, creating one of the world's largest pure-play enterprise software companies. Reports indicated Monsanto is could announce a deal to be acquired by Bayer next week at price a little below $130/share. And Liberty Media Corp agreed to acquire motorsports league Formula One for an equity value of $4.4B.


Sun 9/4
(CN) CHINA AUG CAIXIN PMI SERVICES: 52.1 V 51.7 PRIOR

Mon 9/5
(EU) EURO ZONE SEPT SENTIX INVESTOR CONFIDENCE: 5.6 V 5.0E
(RU) SAUDI ARABIA AND RUSSIA SIGN AGREEMENT ON OIL MARKET; discussed cooperation on oil and gas to avoid catastrophe and achieve stability; could include possible production freeze (as speculated)

Tues 9/6
(AU) RESERVE BANK OF AUSTRALIA (RBA) LEAVES CASH RATE TARGET AT 1.50%; AS EXPECTED
(EU) EURO ZONE Q2 FINAL GDP Q/Q: 0.3% V 0.3%E; Y/Y: 1.6% V 1.6%E
CPHD: To be acquired by Danaher for $53/shr valued at $4B
SE: To combine companies with Enbridge in an all stock for stock merger, EV at C$165B; values Spectra common stock at ~C$37B
NAV: Confirms wide-ranging strategic alliance with Volkswagen Truck & Bus; VW to invest at $15.76/shr for 19.9% stake
(US) AUG ISM NON-MANUFACTURING COMPOSITE: 51.4 V 55.0E (lowest since Feb 2010)
(US) Aug Labor Market Conditions Index Change: -0.7 v +1.0 prior
FDML: Enters into definitive merger agreement with Icahn Enterprises L.P. at $9.25/shr in all-cash offer
CMG: Pershing Square discloses new 9.9% stake; intends to engage in discussions with management - 13D filing
(AU) AUSTRALIA Q2 GDP Q/Q: 0.5% V 0.6%E (1-year low); Y/Y: 3.3% V 3.3%E (annual pace hits a 2-year high)

Wed 9/7
(SE) SWEDEN CENTRAL BANK (RIKSBANK) LEAVES REPO RATE UNCHANGED AT -0.50%; AS EXPECTED
(CN) CHINA AUG FOREIGN RESERVES: $3.185T V $3.190TE (lowest level since Dec 2011)
(UK) JULY INDUSTRIAL PRODUCTION M/M: +0.1% V -0.2%E; Y/Y: 2.1% V 1.9%E
(UK) JULY MANUFACTURING PRODUCTION M/M: -0.9% V -0.3%E; Y/Y: 0.8% V 1.7%E
(CA) BANK OF CANADA (BOC) LEAVES INTEREST RATES UNCHANGED AT 0.50%; AS EXPECTED
AAPL: Introduces iPhone 7 and Apple Watch 2 - product event
(US) FEDERAL RESERVE RELEASES BEIGE BOOK: ECONOMY CONTINUED TO EXPAND AT MODEST PACE THROUGH LATE AUGUST; UPWARD WAGE PRESSURES INCREASED FURTHER
(JP) JAPAN Q2 FINAL GDP Q/Q: 0.2% V 0.0%E; ANNUALIZED GDP: 0.7% V 0.2%E (2nd straight expansion both quarterly and annualized)
(CN) CHINA AUG TRADE BALANCE: $52.1B V $58.4BE

Thrs 9/8
(CN) China Passenger Car Association (PCA): China July vehicle sales 1.8M units, +24.5% y/y; YTD 14.2M units, +12.7% y/y
(EU) ECB LEAVES MAIN 7-DAY REFINANCING RATE UNCHANGED AT 0.00%; AS EXPECTED
(EU) ECB Statement: Reiterates to continue €80B/month asset purchases program until Mar 2017 or beyond if necessary (no change in current timeline)
(US) INITIAL JOBLESS CLAIMS: 259K V 265KE; CONTINUING CLAIMS: 2.14M V 2.15ME
(EU) ECB chief Draghi: Sees rates at present or lower level for extended period; to preserve very substantial amount of support - prepared remarks
(EU) ECB chief Draghi: Did not discuss extension of QE; working on smooth implementation of policies, changes are needed - Q&A
(EU) ECB chief Draghi: Have not discussed helicopter money or equity buying
(US) DOE CRUDE: -14.5M V +0.5ME; GASOLINE: -4.2M V -0.5ME; DISTILLATE: +3.4M V +1ME (largest crude draw since 1999)
(PE) PERU CENTRAL BANK (BCRP) LEAVES REFERENCE RATE UNCHANGED AT 4.25%; AS EXPECTED
(KR) BANK OF KOREA (BOK) LEAVES 7-DAY REPO RATE UNCHANGED AT 1.25%; AS EXPECTED (3rd straight puase in current easing cycle)
(CN) CHINA AUG CPI Y/Y: 1.3% V 1.7%E; 10-month low
(CN) CHINA AUG PPI Y/Y: -0.8% V -0.9%E; 54th consecutive month of decline; smallest decline since Apr 2012

Fri 9/9
(FR) FRANCE JULY INDUSTRIAL PRODUCTION M/M: -0.6% V +0.3%E; Y/Y: -0.1% V +1.0%E
(FR) FRANCE JULY MANUFACTURING PRODUCTION M/M: -0.3% V +0.7%E; Y/Y: 0.4% V 1.8%E
GILTS: (UK) 10-year Gilt yield approaching 0.81%; highest since BOE announced new QE measures back on Aug 2nd - dealers
(US) Fed's Rosengren (moderate, FOMC voter): Sees reasonable case for gradual tightening
(CA) CANADA AUG NET CHANGE IN EMPLOYMENT: +26.2K V +14.0KE; UNEMPLOYMENT RATE: 7.0% V 7.0%E
(US) Weekly Baker Hughes US Rig Count: 508 v 497 w/w (+2%)

>>> US Close Dow -2.13% S&P -2.45% Nasdaq-2.54% Russell -3.11%


Closing Market Summary: Stocks Tumble with Interest Rates in Focus

The stock market ended an otherwise flat week on a sharply lower note as increasing interest rates spurred selling interest in the broader market. The Nasdaq Composite (-2.5%) settled in-line with the S&P 500 (-2.5%) and behind the Dow Jones Industrial Average (-2.1%). The three indices ended the week with losses between 2.2% and 2.4%.

Global markets tilted to the downside as participants responded to a negative set of economic data and news that North Korea carried out another nuclear test. However, the negative headlines failed to elicit a bid in the bond market. The counterintuitive move in bonds incited further angst regarding yesterday's policy statement from the European Central Bank and rising fed funds rate hike expectations.

The ECB released its September policy statement yesterday, holding its monetary policy stance steady. The central bank opted to keep its key interest rates at record lows while maintaining the size and scope of its asset purchases. Furthermore, ECB President Mario Draghi struck a hawkish tone, indicating that the Governing Council didn't discuss extending the asset purchase program at the latest meeting.

DoubleLine's Jeffrey Gundlach added to rate angst, stating after yesterday's close that it's time to get defensive on bonds. The bond fund manager argued that a shift in longer-term inflation risk will drive monetary policy going forward. On that note, Boston Fed President, and FOMC voter, Eric Rosengren struck a somewhat hawkish tone today, stating that there is a reasonable case for continuing on the gradual path towards interest rate normalization. Furthermore, Fed Governor Daniel Tarullo said that he wouldn't foreclose the possibility of a rate hike this year.

The benchmark index remained under heavy pressure throughout today's session, carving out a session low in the final hour of trade. All ten sectors ended with sharp losses as energy (-2.8%), materials (-2.9%), telecom services (-3.4%), and utilities (-3.8%) finished on the bottom of the leaderboard. Conversely, financials (-1.9%) and health care (-2.0%) ended with the narrowest losses.

The PHLX Semiconductor Index (-3.7%) finished well behind the benchmark index, retracing its August gain. The index rallied 4.5% in August, but has declined 4.1% thus far in September. Skyworks (SWKS 66.76, -4.67) finished at the bottom of the index. The iPhone supplier declined 8.6% since Apple (AAPL 103.13, -2.39) unveiled the iPhone 7 on September 7.

The commodity-sensitive energy (-2.8%) space finished in the red as crude oil ended its day lower by 3.7% ($45.88/bbl; -$1.78). However, WTI crude finished the week higher by 3.4%. The energy component was under pressure as participants dialed back the potential impact of yesterday's inventory report from the Department of Energy. In the sector, Williams Cos (WMB 30.04, -1.11) lost 3.6% after Enterprise Products (EPD 26.81, -0.44) announced that it is no longer pursuing a combination with the company.

Biotechnology displayed relative weakness in the health care sector (-2.0%), evidenced by the 3.3% loss in the iShares Nasdaq Biotechnology ETF (IBB 278.63, -9.40). Biogen (BIIB 296.10, -11.63) underperformed in the ETF after the stock was removed from the focus list at Goldman Sachs. Conversely, Gilead Science (GILD 78.08, -0.90) fell 1.2% after Gabelli issued a bullish note on the name.

The economically-sensitive financial sector (-1.9%) finished ahead of the broader market, benefiting from rising rate hike expectations and some steepening in the yield curve. The fed funds futures market indicates that the odds of a rate hike at the September meeting have increased to 24.0% from 18.0% in the prior session.

Treasuries ended sharply lower with the long end of the curve demonstrating relative weakness. The yield on the 10-yr note rose seven basis points (1.67%) while the yield on the 2-yr note ticked higher by one basis point (0.78%).

Today's participation was above the recent average as more than one billion shares changed hands on the NYSE floor.

Today's economic data was limited to Wholesale Inventories for July: 

  • Wholesale inventories were unchanged in July, as expected, following an unrevised 0.3% increase in June.
    • The report won't have any material sway on economists' third quarter GDP forecasts since the reading was in-line with the consensus estimate.

There is no domestic economic data of note scheduled for Monday.

  • Russell 2000: +7.7% YTD
  • S&P 500: +4.1% YTD
  • Dow Jones: +3.8% YTD
  • Nasdaq Composite: +2.4% YTD