Ignatius Bose

With the Federal Reserve all but certain to cut interest rates at its policy meeting at the end of July, Steve Ricchiuto, the chief economist of US markets at Mizuho Americas is one of the critics against a rate cut. While the Fed has cited the ongoing trade conflict with China, falling consumer inflation and other headwinds that could threaten the country’s eleventh successive year of expansion as the reason to cut rates, Steve has joined a few other analysts in opposing the view. He asserts that the Fed would be aggravating any forthcoming economic slowdown if it goes ahead and cuts the already low-interest rates. Ricchiuto insists that the last three recessions in 1990-91, 2000-01 and 2007-09 were caused by credit bubbles due to the careless policies by the Fed, which it is about to repeat. In his research note to clients, he argues that a rate cut would lead to unnecessary risk-taking by borrowers and deepen the next recession. He says that while a recession is good for an economy as it gets rid of the dangerous excesses during an expansion, forced credit structuring would worsen the recession and the economy would need more time to recover.

In a bid to aid small and medium-sized firms from gaining access to affordable financing, the Chinese central bank offered fresh medium-term loans to the country’s financial institutions on Tuesday. The People’s Bank of China (PBOC) pumped in a total of 497.7bn yuan ($72.3bn), with 200bn yuan in one year, via the medium-term lending facility (MLF) and 297.7bn yuan through the targeted medium-term lending facility (TMLF). While the infusion more or less offset the 502bn in MLF loans that were due to expire on Tuesday, the central bank maintained its liquidity supply by leaving interest rates on the MLF and TMLF unchanged at 3.3% and 3.15% respectively. The PBOC’s move is in line with its easy policy stance which it adopted last year following the trade war with the United States. While the Chinese central bank aims to provide affordable financing to distressed small and private companies often termed as high credit-risk firms in a bid to protect jobs, it has slashed the reserve requirement ratio (RRR) of banks six times in 2018 to free up money to lend. With the drawn-out trade war getting costlier by the day, Beijing is keeping all its policy tools open including aggressive interest rate cuts to tide over mounting debt.

Equifax (NYSE:EFX) is close to settling a nationwide consumer class-action lawsuit with the Federal Trade Commission (FTC) over a 2017 data breach. According to The Wall Street Journal citing sources, Equifax is expected to pay around $700m in a deal to resolve a lawsuit involving one of the largest data breaches involving private data of American citizens. While the company failed to notice the attack for almost six weeks, social security numbers and other private information such as birth dates, addresses, credit card and driver licence numbers of almost 150 million people were compromised during that time. With the settlement expected to be announced as early as Monday, the deal would absolve the firm from investigations by the FTC, most state attorneys general and the Consumer Financial Protection Bureau. Shares of Equifax are trading with gains of 0.13%, at $121.28 on the NYSE on Monday. In the year to date, the consumer credit reporting agency has returned more than 47%.

While the sterling has lost 2% of its value to the US dollar in the year to date and more than 4% since March 2019 on fears of a no-deal Brexit, a report by the National Institute of Economic and Social Research (NIESR) paints a bleaker picture for the UK currency. According to NIESR’s latest report on Monday, economic growth in the UK is likely to have slowed down, with a one in four possibility of the economy already being in a technical recession. If Britain exits the European Union without a deal, the outlook could be extremely gloomy with a strong chance of a severe downturn before the economy begins to rebound in 2021. If, on the other hand, a no-deal Brexit is avoided, the UK’s economic growth could advance by about 1% this year and in 2020 respectively, although uncertainty would lead investors to hold back investments. The NIESR’s report pushed the pound sterling down by about 40 cents towards 1.2450 versus the greenback before profit-booking drove the currency back above 1.2480. However, the political risk in Britain and the extremely vulnerable external position is likely to affect the GBP in the near-term as another Brexit deadline approaches with zero clarity.

In a bid to replicate the NASDAQ-style of trading for home-grown tech firms, China launched a brand new stock exchange; the Science and Technology Innovation Board, or STAR market, on Monday. The STAR market, operated by the Shanghai Stock Exchange, registered 25 companies in the initial phase amid loose trading rules as Beijing looks to become technologically self-sufficient and compete globally in the wake of the ongoing trade tensions with the United States. The highly independent exchange, which is aimed at helping Chinese companies find investment, not only permits firms to register without applying to the government regulator but also allows startups that haven’t yet recorded a profit to list on the board. The exchange does not set any price limits on stocks during the initial five trading days unlike the 44% cap on debut trading on the other Chinese exchanges. In the subsequent sessions, shares will be allowed to rise or fall by a maximum of 20%, which is twice the daily limit on the other exchanges. However, restrictions are placed on traders in the form of minimum account requirements and trading experience. On the first trading day, 16 of the 25 companies listed on the exchange ratcheted average gains of around 140%, driving the market cap of the firms to a record $44.3bn, according to Reuters. While the IPO’s were oversubscribed by an average of 1700 times by retail investors, wild price swings led the shares of the weakest performer to leap by more than 84% while shares of semiconductor firm, Anji Microelectronics Technology Co. Ltd. surged by 520% of its IPO price, valuing the company at more than 240 times its 2018 earnings. While the initial frenzy has led to a stellar performance of China’s NASDAQ-style board, the debut has taken away the attention and liquidity from the other Chinese exchanges with the benchmark Shanghai Composite Index and the blue-chip CSI300 Index ending the day in the red.

With markets pricing in a Fed rate cut later this month, US equity markets are edging higher with all the key stock indices hitting fresh all-time highs every other day. However, Morgan Stanley's chief investment officer, Mike Wilson is cautioning investors from jumping into the stock markets at current levels. According to Wilson, while the stock markets may not experience the kind of slump seen last year, they are expected to correct by around 10% in the next three months. Wilson believes that corporate earnings estimates are about 5-10% higher than what they should be and once those estimates are revised, it would weigh on stocks with the S&P 500 likely to slide to 2,750 by the end of the year, a more than 8% drop from Thursday’s closing of 2,995.10. He also said the broad index is likely to face technical resistance at 3,000 and while the Fed is certain to cut interest rates this month, it could turn out to be “sell the news” kind of affair. He believes investors will be better off if they buy stocks over the next three to six months or maybe in 18 months too.

BlackRock Inc. (NYSE:BLK) reported a 2.2% drop in year on year revenue in the three months through to 30th June after the company lowered its fee for lending out stocks and to achieve performance targets. In spite of the world’s largest asset manager attracting more than $150bn in new funds, most of them were moved into fixed-income instruments and cash accounts which derive lower fees. In addition, with stock demand by hedge funds waning, the asset management company was forced to slash its lending fees, lowering its revenue and profit. BlackRock’s net income fell to $1bn, or $6.41 a share, in the second quarter from $1.07bn or $6.62 apiece a year earlier, below analysts’ expectations of $6.50 a share. The company, however, reported a 20% growth in its software licencing business and other technology to financial companies. In addition, the asset management giant’s iShares ETF’s registered a growth of more than 17% quarter on quarter.

Shares of Asos (LON:ASC) are trading with gains of close to 2% on Friday after tumbling more than 23% in the previous session after the online fashion retailer issued a profit warning for the second time in seven months, citing IT and stock issues in its overseas markets. Asos, once a favourite among investors, has plunged more than 72% from its March 2018 peak of 7,770.00 pence. In December last year, the stock slumped more than 54% after it issued a profit alert. Despite chief executive Nick Beighton saying that the company would turn things around this year with a profit of £30-35m, the guidance was below analysts’ expectations of £55m and at a third of the firm’s profit of £102m in 2018. Asos is in the midst of operational issues abroad. In Germany, the switch from manual to automated order processing led to operational failures. Meanwhile, in the US, the firm faced stock shortages after clothing manufacturers failed to deliver the products on time, leading to a lower than expected sales in Europe and the US. While analysts cite management credibility to be the key concern, it won’t be long before Asos takes a call on axing its chief executive.

The second-quarter earnings announcement by International Business Machines Corp. (NYSE:IBM) was a mixed bag although the tech giant beat Street estimates on a number of parameters. Beginning with the positives, IBM’s net income of $2.5bn in the second quarter at $2.81 a share came in higher than the $2.4bn at $2.61 a share a year earlier. Revenues from the cloud, cognitive and business services rose and were either in line or better than analysts forecast. The company’s acquisition of Red Hat, expected to close on 2nd August is likely to boost its cloud and services growth, going forward. The company also reiterated its full-year adjusted earnings guidance of $13.90 a share, in line with Street estimates. On the negatives, IBM recorded the fourth straight quarter with negative revenue growth. The tech giant’s total revenue fell to $19.16bn from $20bn the previous year, largely led by a more than 6.5% drop in the firm’s largest business segment, global technology services. Analysts were expecting IBM to report total revenue of $19.17bn. IBM has gained 25.86% year to date and the stock is poised to open with losses of more than a per cent on the NYSE on Thursday.

Data from the National Association of Realtors showed that residential purchases by foreigners in the US from April 2018-March 2019 fell by 31% when compared to the previous year. Likewise, in monetary terms, the investment of $77.9bn by foreign buyers in US residential homes represented a 36% drop, year on year. Broadly, the Chinese are the biggest foreign buyers of American residential properties, and while they accounted for about 17% or $13.4bn in foreign real estate purchases up to March this year, it is sharply lower from the $30.4bn in purchases in the 12 months to 31st March 2018. According to experts, the ongoing trade dispute between the Trump administration and Beijing is likely to worsen the situation and the outlook for the real estate sector in the US. Added to that, the tighter regulations placed by Chinese authorities on commercial bank lending is likely to impact Chinese purchases of US homes. The US housing market is currently tight with prices at historic highs in some regions, especially along the West Coast where Chinese buyers are the major players. However, with interest waning from foreign buyers who typically pay in cash, the real estate industry could be looking at a price correction in the months ahead.

The key takeaway from Netflix’s (NASDAQ:NFLX) second-quarter earnings announcement on Wednesday was the addition of fewer paid subscribers, resulting in a lower net income. Netflix declared that it added 2.7 million paid subscribers in the April-June quarter, sharply lower than the 5 million new customers predicted by the firm and the 5.3 million anticipated by analysts. The lower-than-expected subscriber additions were led by a loss of 126,000 domestic paid subscribers compared to market expectations of a gain of 310,000. According to Netflix's CEO, Reed Hastings, a lack of fresh content and seasonality, in addition to a price increase, contributed to the shortfall in new subscriptions, which were mostly led by a wave of price-conscious customers looking for competing service providers and more content options. However, the video streaming giant looks to turnaround the business this quarter and expects to add 7 million new subscribers after including new launches and episodes along with the premiere of its franchise programme “Stranger Things.” Shares of Netflix tumbled 10.76% to $323.24 in the extended session on Wednesday following the disappointing earnings announcement. In the year to date, the stock is up 35% compared to the 23% gains on the NASDAQ.

Microsoft (NASDAQ:MSFT) is expected to announce its fiscal fourth-quarter results after the market hours on Thursday with investors keenly eyeing the earnings to see if the tech giant manages to hold on to its trillion-dollar market cap. Investors will also be watching the performance of Microsoft’s cloud service Azure which is directly in competition with Amazon Inc.’s cloud services, especially after the company reported a robust 73% growth in annual revenues in the first quarter. On the fiscal fourth-quarter earnings outlook, Microsoft is expected to post adjusted earnings of $1.21-1.25 a share from the earlier reported $1.19 a share on revenues of $32.77bn-32.90bn, which is more or less in line with the company’s estimates. Microsoft is currently in a rare group of companies with a valuation of more than a trillion dollars after the tech giant overshot the mark following its last earnings report, and has not looked back since then. According to FactSet, 29 out of 32 analysts are bullish on the stock with either a “buy” or “overweight” rating and an average price target of $144.41. Microsoft settled at $137.08 on Tuesday, down 1.31% for the session, just a day after hitting all-time highs of $139.54.

With supermarkets around the world partnering with online e-commerce firms to meet the growing demand for home delivery, Carrefour SA (EPA:CA) has decided to take on the domestic and international competition head-on by associating itself with Spanish start-up Glovo for home delivery services. The French supermarket chain will team up with Glovo in France, Italy, Spain and Argentina with the partnership likely to begin operations as early as October this year with the goal of delivering about 2,500 products to customers within 30 minutes. Carrefour, which is Europe’s largest retailer, announced a five-year plan last year in which the supermarket giant aims to increase its online food sales from €1.2bn in 2018 to €5bn by 2022. With an investment of €2.8bn in digital commerce, the retailer is deploying a large array of e-commerce offers, in both rural and urban areas in France, directly taking on the competition. Glovo, on the other hand, was founded in 2015 and competes with the likes of Uber Eats and Deliveroo. While the company has been typically a loss-making enterprise, the partnership with Carrefour could be the best chance for the e-commerce start-up to turn its business around.

Shares of Wells Fargo (NYSE:WFC) fell close to 3% after the company reported its second-quarter results, which were largely in line with Street expectations. The investment bank’s net income rose to $6.2bn, or $1.30 per share, from $5.2bn, or 98c per share, a year earlier, which was in line with analysts’ expectations. Revenue, unchanged at $21.6bn, came in higher than Street expectations of $20.9bn while net interest income (NII) fell 3.6% to $12.10bn, slightly below the $12.20bn projected by experts. However, in the post-earnings conference call with analysts, CFO John Shrewsberry cut the NII outlook for 2019 by almost 5%, citing a change in the interest rate-setting. This comes after he stated a 2-5% fall in the NII guidance just three months back, which triggered a sell-off in the stock. While the NII guidance is based on expectations of 1-2 interest rate cuts this year, markets are anticipating the Fed to slash interest rates by 75 basis points via three rate cuts. Shares of Wells Fargo have tumbled on the result day for the last three quarters in a row, and in nine out of the last ten quarters. The stock is down 1.7% year to date compared to the more than 18% gains in the SPDR Financial Select Sector ETF.

The pound sterling fell to a six-month low against the greenback and the euro on Tuesday after the leading contenders vying for the post of UK prime minister reignited fears of a no-deal Brexit in a late-night debate on Monday. The two frontrunners; Jeremy Hunt and Boris Johnson said on Monday that they would not accept the European Union’s demand for a Northern Irish backstop as part of the Brexit deal, a key element designed to prevent a hard border between EU member Republic of Ireland and Britain’s Northern Ireland. At 3:30 pm GMT on Tuesday, the sterling slipped to $1.24004, its lowest conversion rate since 3rd January and is within striking distance of the April 2017 lows. Likewise, the GBPEUR pair fell about 0.5% and was seen trading at more than six-month lows of 1.10647 versus the euro. With business confidence falling for five straight quarters and the manufacturing sector contracting for two months in a row, UK’s unemployment and the wage growth data announced earlier today comes as a sigh of relief for a country gripped in Brexit uncertainty.

Rio Tinto Plc.’s (LON:RIO) copper mine in the southern Gobi desert of Mongolia is likely to be delayed by more than two years after the project hit bedrock at Oyu Tolgoi; Mongolia’s border with China. According to Rio Tinto, one of the world’s largest copper mine comprising of series of underground tunnels, some of them extending as deep as 4,000 feet have come in contact with rocks of varying strengths, leading to heightened risk of landslides, compelling the mining giant to come up with an alternate plan which is projected to be ready only next year. Rio Tinto has an indirect interest of 50.8% in the mine and the 30-month delay is expected to spike the project cost by $1.9bn-7.2bn, the impact of which will be directly felt on Rio Tinto’s net profit in the short-term. In addition, with global copper demand anticipated to exceed supply by 190,000 metric tons this year and 250,000 metric tons next year on the back of a stable 25m metric tons annual output, prices of the industrial commodity used in the production of everything from power cables to smartphones and electric cars are expected to surge. Shares of Rio Tinto Plc. have soared more than 30% YTD while copper futures (HG) on the Comex have gained a little more than 3% this year.  

The New York Empire State Manufacturing Index rebounded 12.9 points to 4.3 in July after posting the largest monthly decline on record last month. Following are the highlights of the index compiled from a survey of 200 executives from companies in the manufacturing sector based out of New York- The manufacturing index jumped to +4.3 in July from -8.6 the previous month. The new-orders subindex declined at a slower pace of -1.5 from -12.0 in June. The employment index fell to -9.6, the lowest in three years, after slipping to -3.5 in June. Shipments moderated to 7.2 vs 9.7 in June. Prices continued to remain under pressure with input prices skidding to 25.5 in July versus 27.8 the previous month while output prices dipped to 5.8 from 6.8 during the corresponding period. Delivery time for shipments rose while unfilled orders and inventories continued to fall. While the index did not worsen further in July in spite of the June factory activity measured by the ISM sliding to its lowest level since October 2016, optimism about business conditions for the next six months is sure to bring some relief to the domestic economy.

Anheuser Busch InBev NV (EBR:ABI), the world’s largest brewer abruptly decided to defer the initial public offering (IPO) of its Asian business after a week-long roadshow, citing market conditions. In what was perceived to be the world’s biggest public offering this year, AB InBev’s listing on the Hong Kong Stock Exchange on Friday was anticipated to fetch anywhere between $8.3-9.8bn, raising the brewing giant’s market capitalisation in the APAC region to $54-64bn. According to sources, the high valuations of Budweiser APAC put off potential “long-only” funds, who were expected to place large orders but failed to show up on the last day. AB InBev valued its Asian business at 16-18 times its expected enterprise value (EV) to EBITDA in 2020, and while the EV/EBITDA ratio of its parent AB InBev is currently at 11, the other Asian centric brewers are said to be trading between 11 and 19 times EV/EBITDA, according to Refinitiv Eikon data. While the failed flotation comes just a day after Swiss Re AG shelved its $4.1bn IPO in London, stating weak demand from institutional investors, the deferred Budweiser APAC IPO not only lends a blow to the heavily indebted Brussels-based brewing giant, but to Hong Kong’s bourse operator, who was looking forward to this deal to become the leading venue for global listings this year.

In a series of tweets and interviews over the past few weeks, US President Trump has criticised the Eurozone and a few other countries for gradually weakening their currencies, leading to a disadvantage to US exporters. In addition, Trump has also not spared ECB President Mario Draghi after he said that the central bank was open to additional monetary stimulus. According to Goldman Sachs analyst, Michael Cahill, Trump’s comments and tweets have put the spotlight back on the US currency policy, cutting against norms that have been in place since the 1990s. Cahill says that while quantitative easing (QE) has become conventional, FX intervention could be a part of Washington’s currency policy. However, such a move could lead to a “sizeable” market reaction. He anticipates a currency intervention to weaken the US dollar along with foreign risk assets like stocks and corporate debt, while the Japanese yen is likely to get stronger. While the Trump administration is looking for ways to weaken the dollar, Cahill says that while there are a number of operational issues to address, such as the Fed participating or the international committee coordinating such an effort, the Fed’s intent to ease interest rates should be enough to weaken the dollar.

According to the International Energy Agency (IEA), the surge in US crude oil production is likely to affect demand for oil produced by the Organisation of the Petroleum Exporting Countries (OPEC), despite efforts by the group and its allies to cut oil production. The agency estimates oil demand from OPEC members to fall to 28 million barrels a day in the first quarter of 2020, the lowest amount in 16 years and below OPEC’s downwardly revised estimates of 29.3 million barrels per day in 2020. The IEA is of the view that markets were oversupplied to the extent of 900,000bpd in the first half of this year with the surplus adding to the stock buildup in the second half of 2018. In addition, the slowdown in manufacturing activity across most major economies on the back of trade spats and the ongoing uncertainty surrounding global trade are all affecting worldwide oil demand. The IEA said that while crude oil production in June increased in the US, Kazakhstan, Brazil, Saudi Arabia, Russia, and Nigeria, cuts were noticed in Iran, Iraq and Angola. The International benchmark, Brent Crude is up about 22% this year while WTI Crude has gained about 20% YTD.

In his testimony to the House Committee on Financial Services and the Senate Banking Committee, Fed chairman Jerome Powell said that the US economy is facing adverse business sentiment due to a severe “confidence shock.” While the confidence was somewhat restored after the Fed stepped in and assured markets that it would ease interest rates as early as this month, trade uncertainties and the global growth outlook would continue to weigh on the US economy going forward. The Fed chairman said that while he was concerned about the slowdown in global growth and the outlook for manufacturing activity, the Fed will go all out to maintain the current state of expansion, which is in a record eleventh year. In his answer to a question on why he intends to cut interest rates in spite of the economy expanding amid a robust labour market, Powell said that the US economy is in “a very good place” and the goal of the central bank’s monetary policy is to sustain the current expansion in growth for as long as possible. He also said that with inflation on the decline, most of his colleagues at the rate-setting committee were suggesting a more accommodative monetary policy, a clear signal that the central bank would extend a rate cut at its monetary policy meeting on 31st July.

J.P. Morgan’s chief equity strategist Dubravko Lakos-Bujas says that the outcome of the US-China trade policy would have a major bearing on the S&P 500, one way or the other. With Washington and Beijing expected to restart discussions, and if a trade deal coincides with the Fed cutting interest rates, Lakos-Bujas expects the S&P 500 to rally to 3200-3300, about 10% from Wednesday’s closing. On the contrary, if the trade dispute escalates, he anticipates the index to tumble more than 16%, to 2500. According to the J.P. Morgan analyst, while a trade deal would give much-needed clarity to US companies on future trade policies, an escalation would affect US corporates to a far greater extent than the Fed policy or the corporate tax cuts brought about in 2017. While he expects the impact of the trade tariffs to lower the EPS of the S&P 500 by $5, he estimates the cost to individual households to rise from $600 to $1550 a year, defeating the recent tax benefits. The S&P 500 settled near its all-time highs of 2993.10 on Wednesday after briefly surging above 3000 for the first time in history.

While asset management companies such as Goldman Sachs and Lazard have been constantly advocating investors to look at emerging markets as a key driver of growth in the next seven to twenty years, columnist Howard Gold begs to differ. According to him, since the bear market bottom in 2008-09, the iShares MSCI Emerging Markets Index has surged 175% while the Vanguard Total Market Index which broadly tracks US stocks has jumped 350% and the S&P 500 has gained about 270%, putting to rest conventional wisdom of investing in emerging markets. A deeper insight into the indices, however, shows that the issue may not be with the economies or the stock themselves, but the index composition which is more tilted towards Chinese shares, thereby not representing the broad emerging market economies or their equity markets to a large extent. Howard cites higher volatility as another risk with investing in emerging markets. Based on his analysis, the standard deviation in EM stocks in the last 30 years to August 2018 was more than 22% compared to 14% for the S&P 500, making EM equities 50% more volatile compared to US stocks. With China’s markets opening up to institutional investors, the MSCI and the FTSE Russell are expected to further load the EM indices with Chinese stocks, taking away the benefits of diversification, even as the correlation between the EMs and the developed markets intensify.

Shares of Gerresheimer AG (ETR:GXI) are soaring by more than 8% on Thursday after the German pharmaceutical packaging firm reported more than a 140% surge in net income for the second quarter and reiterated its full-year revenue guidance. Gerresheimer, the German-based manufacturer of primary packaging products for medication reported a net profit of €47.1m for the three months to 31st May compared with €19.3m in the previous year. Likewise, the quarterly earnings before interest, taxes, depreciation and amortisation (EBITDA) surged by 38% to €99.4m while revenues rose 7.2% to €356.5m respectively. Gerresheimer maintained its revenue outlook of €1.40-1.45bn for full-year 2019 while it anticipated adjusted EBITDA to come in at around €295m, +/- €5m, excluding the €118.5m already accounted for from the acquisition of Sensile Medical. At 12.30pm GMT on Thursday, shares of Gerresheimer were trading at €70.65, soaring 8.61% for the session. The company’s stock has had a rollicking year with prices jumping more than 23% YTD compared to the 17% gains on the DAX 30.

Fed Chairman Jerome Powell will appear before the House Committee on Financial Services on Wednesday and the Senate Banking Committee on Thursday where he is expected to speak about the waning economic activity in the US and the mounting risks to the broad economy. Just like how past Fed chairs played both sides in their testimony to the Congress, Powell is likely to say that the economy is in good shape, but the Fed might ease as insurance to spur growth. Traders will be keenly watching the chairman’s testimony to see how much and how soon the Fed intends to cut interest rates, even as markets have priced in a 100% chance of a 25 basis point cut later this month. If Powell’s testimony offers clarity on a rate cut in July, the US stock markets could rally to new highs. On the contrary, if the chairman says that the Fed still has leeway and will prefer to watch and wait before easing, the markets could see a sharp sell-off in the near-term.