As reporters combed through Ford’s Q1 earnings filing after Thursday evening’s blockbuster report, which sent the automatker’s shares soaring more than 8% in after-hours trade, they stumbled upon an important nugget: The company disclosed that the DoJ has launched a criminal investigation into emissions certifications irregularities that the company self-reported back in February.
Before traders get carried away, Ford has caveated this by reiterating that the potential violations don’t involve ‘defeat devices’ like those used in some Volkswagen diesel engines to deliberately cheat American emissions testing.
Ford said the issue at the center of the probe is related to “road load estimations,” which means the company’s calculations of individual vehicle emissions may have been skewed.
Emissions Certification (as previously reported on page 23 of our 2018 Form 10-K Report). As previously reported, the Company has become aware of a potential concern involving its U.S. emissions certification process. This matter currently focuses on issues relating to road load estimations, including analytical modeling and coastdown testing. The potential concern does not involve the use of defeat devices (see page 10 of our 2018 Form 10-K Report for a definition of defeat devices). We voluntarily disclosed this matter to the U.S. Environmental Protection Agency and the California Air Resources Board on February 18, 2019 and February 21, 2019, respectively. Subsequently, the U.S. Department of Justice opened a criminal investigation into the matter. In addition, we have notified a number of other state and federal agencies. We are fully cooperating with all government agencies. Because this matter is still in the preliminary stages, we cannot predict the outcome, and we cannot provide assurance that it will not have a material adverse effect on us.
Though Ford warned that it couldn’t assure investors that the probe wouldn’t have a negative impact on its operations, the company’s shares traded 7% higher in premarket trading.
Last night, Ford reported Q1 adjusted earnings of 44 cents a share on $40.3 billion in sales. Both numbers surpassed Wall Street’s expectations, propelling the company’s shares – which have already strongly outperformed the broader market so far this year – even higher. On Thursday, the company’s shares broke above $10 for the first time since August. Still, the automaker’s shares remain well below their highs from 2011.
With the Atlanta Fed forecasting Q1 GDP of as little as 0.5% about 6 weeks ago, traders were shocked when moments ago the BEA reported a GDP print that at first glance many though was a misprint: at 3.2%, Q1 GDP came in 50% higher than the 2.3% expected, and was the highest Q1 GDP (which is not only the weakest quarter of the year, but also a quarter notorious for its residual seasonality) since 2015.
That was the great news: the not so great news – the number was driven entirely by “one-time items” such as a surge in inventories and a far smaller trade deficit, pushing net trade sharply higher, neither of which is sustainable; meanwhile the core drivers of GDP – consumption and fixed investment – came in somewhat weak, dropping from Q4, with PCE and CapEx adding just 1.1%, or about a third, of the bottom line GDP number.
Specifically, the breakdown of contribution to the bottom line GDP was as follows:
Personal Consumption: 0.82%
Fixed Investment: 0.27%
Change in inventories: 0.65%
Net Trade: 1.03%
Government consumption: 0.41%
Some more details from the report: the increase in real GDP reflected increases in consumer spending, inventory investment, exports, government spending, and business investment that were partly offset by a decrease in housing investment. Imports, which are a subtraction in the calculation of GDP, decreased in the first quarter.
The increase in consumer spending reflected an increase in services (led by health care) that was partly offset by a decrease in goods, specifically motor vehicles and parts. The increase in inventory investment reflected an increase in manufacturing inventories, notably non-durable goods. The increase in exports reflected increases in exports of both goods and services. Additionally, the report noted that the increase in government spending reflected an upturn in state and local government spending, notably investment in structures.
Meanwhile, the Fed is trapped because while on one hand the economy is growing at a torrid pace, at the same time the BEA reported that Core PCE rose at just 1.3%, below the 1.4% expected, and sharply lower from 1.8% last quarter. In total, prices of goods and services increased 0.8% in Q1, after rising 1.7% in the fourth quarter of 2018. Food prices increased 3.0 percent, while energy prices decreased 16.7% in the first quarter.
While it remains unclear if the Fed will resume hiking rates, according to Natalliance Securities, the GDP data squashes the idea of any Rate Cuts. Specifically, the analysts notes that Q1 growth at over 3% shows the economy is growing at a solid pace and makes clear the Federal Reserve won’t have any reason to cut rates this year as some traders are pricing in, according to Andrew Brenner, the head of international fixed income at Natalliance Securities in New York.
“You are seeing a strong enough economy with low inflation and the talk of precautionary rate cuts are way to early and not relevant,” Brenner told Bloomberg, adding that the weaker-than-expected PCE won’t be sufficient to trigger the Fed to reduce rates given growth is over 3 percent and unemployment at below 4 percent. “That is not a formula for the Fed to ease.”
In other words, Powell will have to explain how he is balancing the blistering economic growth on one hand, and the continued slide in “official” inflation.
Climate change, deforestation and desertification have their financial analogy. After all, the financial landscape surely looks like a desert these days – as all juice has been squeezed out. German 10y Bund yields are back below zero, equity indices close to record highs and volatility measures (be that of FX, equities or fixed income) close to record lows. So, when in the desert, make sure you have enough water on you.
Talking of deserts, we have already seen quite some dust biting this week…
Let’s start for instance in the UK where PM May’s efforts to avoid taking part in the EP elections are –very unsurprisingly– running into a wall of sand. A government official yesterday said it is unlikely that the PM will bring the Brexit bill, the official bill that had been kept under wraps, to Parliament next week. And any further delays would make it impossible to get it ratified before 23 May. So, with talks between Conservatives and Labour seemingly stuck (note that Labour might actually reinforce its negotiating position through the EP election outcome), biting the European dust would now seem to be Theresa May’s fate. Cable already fell through the psychological 1.30 barrier earlier this week but this sentiment was further highlighted yesterday, as GBPUSD briefly touched 1.2870. This adds to the evidence that the extension for the Brexit date won earlier by May is not seen in a positive light by the market, because it merely raises the risks but without any commensurate opportunities. Any investor can tell you that is a bad place to be in.
Another key person that arguably bit some dust yesterday was French President Macron, who for the first time during his presidency (! – mistake no. 1? @Trump: eat your heart out!) had an official meeting with the press. The French president blamed some of the public anger, which culminated in violent yellow vest protests that have wrecked the country, on himself. Presenting in a humble fashion and living the dream of “Liberté, Égalité et Fraternité”, Macron said he can “do better”, announcing several new measures to address the public discontent that had been further exposed during the Grand Débat National that took place in March-April. Clearly, some of these measures had a bit of a populist smell to it. But what do you do, when you suddenly realise that you are not as much in control of the situation as you thought you were? Tax cuts for the middle classes worth about 5bn (financed by the elimination of tax benefits for companies, although details are still lacking), the abolishment of the prestigious school ENA, tying low pensions to inflation (as from 2020) and several institutional reforms that would give a better representation of voters at the national and regional level. But the key question obviously is: will it be enough? Can France finally return to business? Yellow vest supporters clearly were not impressed… and neither was the public at large, with a Harris poll suggesting that 63% of the respondents were unconvinced. An economic rebound in the course of this year could perhaps provide the necessary juice for Mr. Macron’s plans to turn around sentiment. But – as we all know too well, this is far from assured.
The risk of failure was underscored by the ECB’s Economic Bulletin, published yesterday. The introductory text largely reflected the more dovish tone set in recent ECB press conferences, noting that the information that has become available since the Governing Council’s monetary policy meeting in March confirms “slower growth momentum extending into the current year.” The text emphasized that Euro area weakness was first and foremost the result of a slowdown in external demand, which had been compounded by country- and sector-specific (domestic) factors, some of which had started to unwind. Despite the latter, the risk to the outlook remains tilted to the downside. Together with the persistence of uncertainties related to geopolitical factors, protectionism, and vulnerabilities in emerging markets, it was argued that the current state of the economy still required significant monetary policy stimulus. This, in turn, would be ensured by the current forward guidance, the reinvestment policy and the upcoming new series of TLTROs. In other words: things are not looking great, but – rest assured – the ECB is in control of the situation!
But the question is whether it is not being overtaken in dovishness – left and right – by other central banks. Case in point yesterday were the BoJ and Riksbank decisions. The BoJ, on which we already reported in yesterday’s Global Daily, introduced new language in is forward guidance, basically assuring the market that it won’t make any tightening moves until spring 2020. That makes the ECB’s language (no rate hike this year) look pusillanimous, although we must admit that the yen actually strengthened slightly against both the dollar and the euro on the back of Kuroda’s press conference. That certainly wasn’t the case for the Riksbank, which decided to delay its planned rate hike increase to early next year whilst extending their bond purchasing program to the end of 2020. The Riksbank argued that unexpectedly low inflation both in Sweden and abroad and low interest rates abroad, together with uncertainty over global developments required caution in setting policy. The Swedish Krona plunged as a result, falling 1.5% in the first 30 minutes following the decision, to settle at around 10.62, which is still almost 1% weaker than the previous trading day
French President Emmanuel Macron gave a rare press conference on Thursday, where he promised to cut taxes and institute other economic reforms as he attempts to reboot his presidency(as FTputs it).
Macron’s speech was wide-ranging, and covered education and the environment – as well as acknowledging the threat of a “political Islam that wants to secede with our Republic.”
“We are talking about a secession that has sometimes slyly installed because the Republic had deserted or had not kept its promises, we are talking about people who, in the name of a religion pursue a political project, that of a political Islam that wants to secede with our Republic. And there, I asked the government to be intractable.” -Macron (via La Presse)
The French President was originally going to announce the reforms on April 15, but postponed due to the fire at Notre-Dame Cathedral. In short – Macron is trying to calm down the Yellow Vests, which have been protesting for more than five continuous months against high taxes and government mismanagement. For reference, here is what they want:
Other key quotes from Macron’s Thursday speech via the Straits Times:
ON MACRON’S GOVERNMENT REFORMS
“I asked myself: Should we stop everything that was done over the past two years? Did we take a wrong turn? I believe quite the opposite.”
ON FRANCE’S TOWN HALL DEBATES AFTER THE PROTESTS
“We are above all children of the Enlightenment. And it is from these debates, these deliberations, this capacity to contradict one another … that good solutions can emerge for the country.”
ON SCHOOLS AND HOSPITALS
“We must maintain public service (in the countryside)… guarantee the access for all to health services and guarantee that no school or hospital will be closed without the mayor’s approval.”
ON REFORMING FRANCE’S CIVIL SERVICE AND ELITE SCHOOLS
“I want to reform our senior public service. This is not a meritocratic system any more… We don’t need job-for-life protection.”
Macron also confirmed he would scrap France’s Ecole Nationale d’Administration, a postgraduate school that was founded in 1945 by Charles de Gaulle to train a postwar administrative elite drawn from across all social classes.
ON SCRAPPING FRANCE’S WEALTH TAX
Macron ruled out re-introducing the wealth tax – known in France as the “ISF” – that his government replaced by a tax lucrative property deals and real estate assets.
“Since it’s a pragmatic reform, it will be re-evaluated in 2020. If it’s not efficient, we’ll amend it.”
ON TAX CUTS
Macron said he wanted to “significantly” reduce income tax to alleviate the burden on the middle classes.
“Workers who pay income tax have widely contributed in past decades. So I’ll be simple, I don’t want tax increases. I want cuts for those who work by significantly reducing the income tax.”
Macron outlined some of the ways the tax cuts would be financed: “I’ve asked the government to implement this tax reduction by closing some corporate tax loopholes, making people work more and cutting public spending.”
Macron called for better control of borders at the national and European level. He said changes should be brought to the Schengen Area, even if it led to a reduction of its scope or to fewer member states.
“To be open, you need limits; to welcome someone, you need a house, so you need borders.”
ON WORKING MORE AND RETIREMENT
“We have to work more, I’ve said it. France works a lot less than its neighbours. We have to have a real debate about this.”
Macron said he did not wish to push back the legal retirement age beyond the current threshold of 62.
But he also outlined the need for measures that would require French citizens to contribute for a longer period to the pension system before retiring.
Exxon shares are slumping pre-market, weighing down The Dow, after big misses in earnings and production.
The headline numbers were ugly:
Exxon Q1 EPS 55c vs Wall Street estimate of 72c
Exxon Q1 Production 3,981 Mboe/D, analysts forecast 4.01 Mboe/D.
And with net income at $2.35 billion, down a whopping 49% year-on-year, and a 61% drop from 4Q 2018, the picture is considerably worse than expected.
A lot of the under-peformance of Exxon at the start of the year is coming from its mighty downstream operation, with includes its refining arm. In Q1 2019, it reported a loss of $256 million in downstream, compared with a profit of $940 million in the Q1 2018.
In the press release, CEO Darren Woods says:
“Solid operating performance in the first quarter helped mitigate the impact of challenging Downstream and Chemical margin environments. In addition, we continued to benefit from our integrated business model. We are making strong progress on our growth plans and expect to deliver sustained value for our shareholders. The change in Canadian crude differentials, as well as heavy scheduled maintenance, similar to the fourth quarter of 2018, affected our quarterly results.”
XOM is down almost 3% in the pre-market, weighing down The Dow…
There is a small silver lining. Despite the big drop in net income last quarter, Exxon did much, much better in cash flow generation, with $8.34 billion between January and March, holding close to the cash the company pumped a year ago (~$8.52 billion) and in the previous quarter ($8.6 billion).
As Bloomberg’s Rachel Adams-Heard notes, Exxon attributes much of the 42% increase y/y in capital expenditures to investment in the Permian Basin of West Texas and New Mexico. That’s where the company’s expected to make its next big purchase, especially now that Chevron’s planning to buy Anadarko.
Given the recent surge in oil prices, this is not a great start to the energy complex earnings season.
Blain’s Morning Porridge, submitted by Bill Blain of Shard Capital
“You’re an excellent judge of horse-flesh Trooper Tyree. You proved that when you stole my horse.”
That was an interesting week… What did we learn?
No surprise at the deepening crisis in Argentina or a comic elected president in Ukraine. Headlines this morning are about the lack of vol in currency markets, worries about Italian debt, and what did Putin promise Kim. Stock markets hit new highs as they continue to lap up any good news and discount negativity… How many column inches did Boeing get after withholding guidance due to the deepening uncertainty about the fix on the B-737 Max or the fact its received zero orders since the second crash? Almost none. Facebook’s privacy breach fine got swept under by the strong results, and the stock rocketed higher….
Traditionally Friday is my rant day….
Nothing surprises me that Facebook stock soared on the back of its strong results. But maybe it should? For months analysts, media and politicians have been fulminating about how the “Surveillance Capitalism” Stocks have pillaged our private data, changed the world and our behaviors through their algorithms, and how social media is damaging us all in ways we barely understand. But when the acid test comes? A call between a bad behavior fine, or increased revenue? Of course we lap up the stock because its advertising revenue is better than expected, discount the regulatory threats, and forget what we were complaining about last week.
Is it complacency, greed or just plain stupidity that makes market behave this way? What’s not to like about rising stock prices?
I worry. The world is so fundamentally changed from anything Ben Graham wrote in “The Intelligent Investor”. The Disruptive Tech companies that have dominated these last 10 years are now maturing. Some are proven. Others continue to overturn conventional investment wisdom and thrive.
Which of these stocks will trigger the Jenga moment?
Let’s start with some analyst buy/sell recommendation ratios:
Tesla – 66% Sell Rec
Facebook – 80% Buy Rec
Netflix – 66% Buy Rec
Lyft – 60% Buy Rec (Uber is coming…)
Facebook is what Facebook is… Forget everything and buy it for its ad revenue… until the next thing comes along or folk just stop using it…
The obviously vulnerable one is Tesla: $700 mm Q1 loss, likely to face a massive cash call as it burns through cash faster than anticipated, run by man who seems to think the market will thank him for asking for yet another $2 bln. Did you know Tesla is being outsold by Audi and Jag electric models in Europe by a factor of around 5 to 1? I’ve driven the Jag and was mightily unimpressed. But, ranting about Tesla would be seal clubbing…
We’ve got the Uber float coming on the back of Lyft. They are taxi companies – just like We Work is just a property play. Do they justify their valuations?
Lets pick on Netflix..
Fresh from a successful $2 bln raid on the Junk bond market this week, Netflix remains a stock market darling.
But first, those of us of a certain age will remember Betamax vs VHS, and the video store. Did you know there is still a single Blockbuster video store open? Its in Oregon and survives mainly on tourists. Back in 1989 Blockbuster was opening a video rental store somewhere in the world every 17 hours.
Netflix certainly does not want to be Blockbuster. It’s over two years since I first wrote about the non-sustainability of Netflix’s subscriber acquisition cost – the amount it pays in content spend to attract subscribers. I questioned whether it could survive long enough to keep paying $12 bln a year for content to attract 35 mm new subscribers per annum, while its also raised $12 bln in debt. Generating increasing negative cashflow and raising debt aren’t generally positive investment themes.
But perhaps Netflix has turned the corner? With nearly 150mm subscribers, it’s now approaching critical mass. Let’s assume each subscriber pays $100 per annum, (they say its higher, but there are 6 month free offers and its cheaper in some countries), then Netflix is moving into positive cash flow (if you discount its debt), and being able-ish to cover that $12 bln annual new content spend.
Gosh? Does that mean it will start paying a dividend or even taxes? Of course not. If Netflix was paying taxes, they’d be doing it wrong. And I suspect its real problem is its reached critical mass just in time for everyone else to want its business niche.
Now the talk is all about how Netflix is going to stand up to competition in the content streaming world. The analysis and media talk about Disney “posing the most serious threat to Netflix’s dominance”.
They are right. Disney is 95 years old, the most valuable entertainment brand, owner of theme-parks, film rights, media, studios and lots of other stuff. It will shortly launch a $7 per month streaming service with all its content from the Mouse, innumerable Princesses, Star Wars and the Avengers.. plus lots of content you didn’t even know was Disney. Disney isn’t the company that replaced Blockbuster. It’s a brand. It makes Content people want to pay for. The three likely biggest movie releases of the year: Frozen II, Star Wars 9 and Avengers are all Disney!
Netflix was a disruptive idea around streaming programmes. Now its trying to become a content brand. Its sole credential for succeeding is its ability to pay up for the best talent…
Disney is clearly a threat to Netflix. Apparently, surveys show about 14% of Netflix subscribers (mostly families with young kids) are considering cancellation and moving to Disney instead – that’s potentially 21 mm subscribers. On the other hand, 20% of Netflix subscribers are expected to subscribe to both Disney and Netflix. Room for both? It’s called competition. Netflix is currently priced like a monopoly.
I was fascinated to read Netflix engineers aim for subscribers to click on a programme within 10 seconds. Must be something wrong with me. I often can’t find anything I fancy watching. I don’t have time to get sucked into series I might not like, and they don’t carry classic Kurowasa classic movies, or John Wayne’s Calvary Trilogy! Instead, I flip to Amazon prime or even the BBC.
I suspect I’m not alone in wondering if I really need Netflix. I recently dumped Spotify, and wasn’t struck by a thunderbolt for doing so. I moved to Apple – another competitor in Netflix’s space!
I was reading about who watches what on Netflix. 72% of Netflix’s watched programmes are “library programming”: The number 1 and 2 shows on Netflix are US version of The Office and Friends. They are classic TV programming and they attract pretty stable audiences. In fact only two of Netflix’s own shows are in its top 10 (according to the WSJ) by viewing time: Stranger Things and Ozark.
Stranger Things got 27 bln minutes of viewings last year. The Office was watched for 46 bln minutes. Even more interesting is viewings of Stranger Things spiked from practically zero to 11bln minutes in the month around the launch of a new series, but then fell back dramatically to less than 1bln a few months later. Viewings of the Office consistently exceeded 3 bln nearly every single month. The lesson? Old classic programming is a better more reliable content filler than new stuff, which needs constant reinvention and replacement.
What would NetFlix do without their library content? Both NBC and WarnerMedia are setting up their own streaming platforms. Over half of Netflix’s library content could go back to competing streaming services. Netflix spins that as a positive: the chief content officer saying: “more of our money to be able to do spectacular new titles.” That’s utter nonsense. No one is subscribing to Netflix for its new content! Its more likely Netflix will accept paying higher licence fees to retain the older popular programmes. The numbers show it’s the old stuff, not their new fancy content that subscribers want!
Netflix is paying $60 million to Beyonce for 3 feature “specials”. It’s a great deal for her – she launched a new live album to coincide with the first programme release. They also paid $40mm to Ricky Gervais for a couple of programmes, and we don’t know what they paid David Attenborough to narrate their nature programme. They are spending even more on hit show makers including the team that made Grey’s Anatomy, Glee, and similar.
If you are a Netflix subscriber, Enjoy.
Are they making the wrong stuff? Back in the dark mists of long ago, I wandered into Blockbuster to rent something just out the cinema or that everyone else was raving about. If I can’t get Game of Thrones on Netflix, I may as well rent it from somewhere else… and could that be true of just about everything Netflix is producing – no matter how good it is?
I suspect it all means Netflix has to change. Either it needs to start advertising – and that probably means a more expensive non-advertising service, or it starts monetising its “big data” collected from its customers – which will no doubt attract much noise. (See Facebook comments above.)
I’ve got a better idea…
We all accept viewing habits have changed. I want to watch what I want to watch when I want to watch. I demand the right to binge watch. So, I want to go somewhere I can download anything. If I need to pay $40 to get Game of Thrones or $1 for the whole series of Citizen Smith.. I’m inventing a Trivago, an Ebay, of Content.. a content shop.. (I won’t call it Blockbuster… but that’s exactly what it will be..) Prices can be set according to demand and timing, or what suppliers will supply at… Disney ain’t stupid – there is a cost (a premium cost) they will sell the Lion King, or any of their content, without a subscription… In such a world, Netflix just becomes another content provider…
My competition in this space will be Prime. I’m off to discuss it will some chaps later…
The parents of Warmbier, who died within six days of returning to the US, said the bill sounded suspiciously like a ransom. But in a Friday morning tweet, President Trump insisted that the bill was never paid, despite an American negotiator’s assurances to the North Korean government that the US would make good on the debt.
In the tweet, Trump contrasted his regime’s hard-line no ransom policy to the Obama administration’s willingness to pay thinly disguised ransoms to the Iranian government and the Afghan Taliban to secure the release of American prisoners, including “traitor” Sgt. Bergdahl.
No money was paid to North Korea for Otto Warmbier, not two Million Dollars, not anything else. This is not the Obama Administration that paid 1.8 Billion Dollars for four hostages, or gave five terroist hostages plus, who soon went back to battle, for traitor Sgt. Bergdahl!
Then, Trump touted his skills as a hostage negotiator, reminding his audience that 20 American hostages have been released since his inauguration, and that no money had ever been paid.
“President Donald J. Trump is the greatest hostage negotiator that I know of in the history of the United States. 20 hostages, many in impossible circumstances, have been released in last two years. No money was paid.” Cheif Hostage Negotiator, USA!
US index futures, European stocks and Asian markets all drifted lower following an ugly report from Intel which hit chip stocks, offsetting a surge in Amazon’s Q1 profits as investors awaited the release of Q1 US GDP data and earnings season continued apace. Even so, global shares were on track for a fifth weekly gain in a row despite subdued trade, while the dollar retreated from 23-month highs.
Global stocks were largely flat on the day after subdued trading in Asia. MSCI’s All-Country World Index was down less than 0.1% as an unexpected tumble in Japanese industrial production underscored worries over the global expansion.
Looking at the key overnight earnings, another FAANG member showed their teeth after the Wednesday blowout number from FB, when Amazon beat EPS expectations by over $3 and didn’t sacrifice this gain in their revenue print, which came in marginally above expectations. This came as web services revenue increased by over 40% with the company reporting their most profitable quarter ever. Clouds remain on the horizon after the bright earnings, however, as the company warned of a slower Q2. In the pre-market AMZN are trading with gains of 1%.
On the flipside, Intel short-circuited and reported shockingly bad earnings guidance despite top and bottom line printing inline with expectations. The hardware maker cut their FY guidance and forecast a weak Q2 as Chinese data centre sales remain soft, as the region is consuming fewer microchips than expected, and follows on from a similar warning sign eschewed from Texas Instruments. As a result of the terrible results INTC is trading with losses of 7% in the pre-market.
Most European bourses opened lower, with Germany’s DAX and France’s CAC 40 being the only gainers. The pan-European STOXX 600 index was down 0.1 percent. The Stoxx 600 was little changed at press time as raw material producer losses were offset by gains in healthcare and media companies. In corporate news in the region, Deutsche Bank cut its revenue target and AstraZeneca posted an increase in cancer-drug sales.
While US stocks continue to trade at all time highs, albeit with dismal volumes suggesting there is little enthusiasm to chase prices here, sentiment in China has turned decidedly for the worse, and Chinese stocks suffered their worst week since October, showing the influence that Beijing’s economic policies still hold over the bull market. As we previewed on Sunday, markets got a taste of how much equities are worth without the prospect of additional measures that had helped restore $2.3 trillion to share values since January. Shanghai stocks lost 5.6%, the most since October, after the Politburo signaled last Friday it will pare back support for the economy amid evidence of a recovery. China’s sovereign bonds, which are rapidly turning into Asia’s worst performers, also slumped.
Meanwhile, the yuan edged up after President Xi Jinping said his country won’t engage in currency depreciation. In overnight China news, President Trump suggested that Chinese President Xi will be visiting the White House soon. In other news, the US is considering concessions on drug protection in talks with China after the latter was said to offer 8 years of IP protections for biologics data vs. 12 years under current US law. SCMP subsequently reported that, Chinese President Xi could travel to the US to sign a trade deal as soon as June; if the two sides finalise a trade deal.
As Bloomberg notes, “it’s a pivotal moment for a world-beating rally in China that’s been underpinned by expectations of more stimulus and ample liquidity” noting that a barrage of earnings from the nation’s largest firms could swing sentiment either way, though the picture isn’t encouraging so far. Traders are also eyeing next week’s trade talks with the U.S., though the closure of China’s markets for a three-day holiday from Wednesday will likely dampen trading.
Meanwhile, back in the US, all eyes are on the U.S. GDP release which will be closely watched after a string of largely resilient data from an economy in its 10th year of expansion. A string of solid numbers has led analysts to revise up their forecasts for growth and the latest consensus estimate is for an annualized 2.3%, while the closely-watched GDP estimate of GDP from the Atlanta Federal Reserve is projecting an outcome of 2.7%, a huge turnaround from a few weeks ago when it was at 0.5%.
“A steady GDP reading will reinforce (stock) bulls’ appetite as worries over a recession will diminish but a potential miss may trigger some nervous profit-taking ahead of the weekend,” said Konstantinos Anthis, head of research at ADSS.
The GDP release will set the stage for the Fed interest rate decision next week, where investors will try to anticipate how the U.S. central bank will react to mostly resilient indicators of late. Yet the rebound has not been mirrored in inflation, which – according to the BLS – remains subdued across much of the developed world, prompting a host of central banks to turn dovish. Just this week central banks in Sweden and Canada have backed off plans to tighten, while the Bank of Japan tried to dispel doubts about its accommodative stance by pledging to keep rates at super-low levels for at least one more year. ECB Vice-President Luis de Guindos on Thursday opened the door to more money-printing if needed to boost inflation in the euro zone. Meanwhile, rate cuts look much likelier in Australia and New Zealand after recent disappointingly weak inflation reports.
In rates, Treasuries edged into the green alongside most European sovereign debt.
Elsewhere in currencies, the euro was off 1 percent for the week at $1.1136 as euro zone economic figures continued to disappoint, though it was 0.1 percent higher on the day. Against a basket of currencies, the dollar was 0.8 percent firmer for the week so far at 98.145 having touched its highest since May 2017.
In commodity markets, spot gold was 0.4 percent firmer at $1,281.81 per ounce. Oil prices dipped on Friday on expectations that producer club OPEC will soon raise output to make up for a decline in exports from Iran following a hardening of sanctions on Tehran by the United States.
. Expected data include 1Q GDP and University of Michigan Consumer Sentiment Index. American Airlines, AON, Chevron, Colgate-Palmolive, and Exxon are among companies reporting earnings
S&P 500 futures down 0.2% to 2,922.00
STOXX Europe 600 down 0.02% to 390.07
MXAP down 0.08% to 162.00
MXAPJ up 0.01% to 537.28
Nikkei down 0.2% to 22,258.73
Topix down 0.2% to 1,617.93
Hang Seng Index up 0.2% to 29,605.01
Shanghai Composite down 1.2% to 3,086.40
Sensex up 0.6% to 38,977.58
Australia S&P/ASX 200 up 0.05% to 6,385.65
Kospi down 0.5% to 2,179.31
German 10Y yield fell 1.3 bps to -0.022%
Euro up 0.08% to $1.1141
Italian 10Y yield rose 5.4 bps to 2.316%
Spanish 10Y yield fell 0.9 bps to 1.082%
Brent futures down 1.1% to $73.56/bbl
Gold spot up 0.4% to $1,282.33
U.S. Dollar Index down 0.1% to 98.11
Overnight Top News from Bloomberg
Theresa May’s plan to stop Britain taking part in European elections in the middle of Brexit looks all but dead. The prime minister is unlikely to put her Brexit bill to Parliament next week, according to a government official
Emmanuel Macron promised a new wave of tax cuts for France’s middle classes as he sought to placate Yellow Vest protesters and reinvigorate his flagging presidency.
China won’t pursue yuan depreciation that harms others, President Xi Jinping says at Belt and Road forum in Beijing. Nation will keep yuan stable at reasonable and equilibrium level, he said
The Trump administration may concede to a Chinese proposal that would give less protection for U.S. pharmaceutical products than they receive at home, according to people familiar with the matter, a move that could draw opposition from the American drug industry
Japan’s factory output unexpectedly fell in March, raising the likelihood that gross domestic product shrank during the first quarter
Oil is poised to notch an eighth weekly gain on the back of OPEC+ production cuts and as the U.S. moves to tighten sanctions against Iran
Japan’s retail investors have propelled their net long yen positions against the dollar to near a record ahead of the nation’s extended Golden Week holidays
North Korean leader Kim Jong Un used talks with Russian President Vladimir Putin to accuse the U.S. of “bad faith” in nuclear discussions, warning that the current detente on the Korean Peninsula was at risk
Japan’s industrial production contracted by a surprisingly large amount in March as falling exports weigh on the world’s third- largest economy
Chinese President Xi Jinping signaled his approval for Trump’s trade war demands in an address to some 40 world leaders where he pledged to address state subsidies, protect intellectual property rights, allow foreign investment in more sectors and avoid competitive devaluation of the yuan
Wall Street is moving closer to modernizing the clubby $2 trillion market for new corporate bond issues while seeking to retain control of a lucrative business that’s being eyed by the tech sector
The new Brexit Party started by anti-EU campaigner Nigel Farage is threatening the ruling Conservatives– and they aren’t even fighting back. Polls put the group on course to win the most votes in the EU elections next month
Asia-Pac risk sentiment was mostly downbeat as markets remained heavily focused on earnings releases and following the lacklustre performance of counterparts stateside. ASX 200 (Unch.) and Nikkei 225 (-0.2%) were both subdued with underperformance seen in Australia’s energy sector after a pullback in oil prices although losses in the broader market were only marginal and the index eventually recovered, while the Japanese benchmark was pressured amid a slew of earnings and following disappointing Industrial Production figures with participants also reducing exposure ahead of a 10-day closure for Golden Week. Elsewhere, Hang Seng (+0.2%) and Shanghai Comp. (-1.2%) opened lower as PBoC inaction resulted to a CNY 300bln liquidity drain for the week but with losses in Hong Kong later pared amid earnings including China Life Insurance which almost doubled its Q1 net from the prior year. Finally, 10yr JGBs are higher with prices underpinned by the mostly risk-averse tone and BoJ presence for JPY 480bln of JGBs in the belly.
Top Asian News
Asian Chip Sector Shares Decline After Intel Cuts Outlook
China Evergrande Is Said to Be Eyeing European Auto Acquisitions
China’s Big Earnings Showdown Looms as Stocks Begin to Sink
Sony Withdraws Some Profit Targets as Forecast Misses Estimates
A Giant in China’s Equity Market Is Starting to Look Expensive
Major European indices are mixed but little changed overall [Euro Stoxx 50 +0.1%], with sectors portraying a similar scene; notably, the Oil & Gas sector is underperforming in-line with the recent downturn in oil prices and with sector heavyweights Total’s (-0.4%) broadly as expected earnings unable to counter the downward pressure. After an earning fuelled morning the FTSE 100 (-0.3%) is somewhat lagging its peers with the index weighed on predominantly by RBS (-4.4%) in-spite of the Co’s beat on Q1 profit before tax, as the Co. stated that the ongoing impact of Brexit uncertainty is likely to impact income growth in the near term. Glencore (-3.0%) and Just Eat (-3.2%) are also weighing on the FTSE 100 after the CFTC stated they are investigating if the Co’s units violated CFTC regulations and as UK Q1 orders increased by only 7.4% respectively. Other notable movers include Deutsche Bank (-3.0%) are lagging the Dax (+0.1%) after the Co. cut their FY19 sales outlook and they expect FY19 revenue to be flat. Elsewhere, Renault (+3.0%) posted Q1 revenue in-line with expectations and confirmed their guidance for FY19.
Top European News
Continental Pushes Ahead With Powertrain Listing as Profit Drops
Ferrexpo Slumps as Deloitte Resigns Amid Charity Probe
Hydrogen as Replacement for Natural Gas Gets a Boost in U.K.
Amundi Sees Investors Pull $7.7 Billion as DWS Stems Outflows
Bayer’s CEO Faces Rebuke to Leadership as Shareholders Gather
In FX, the Kiwi and Swedish Krona are leading a comeback of sorts vs a still solid Greenback that is holding above the 98.000 handle in DXY terms and Fib support just shy of the big figure (97.961), with data providing respite for both G10 currencies in the form of NZ trade and Swedish retail sales. Nzd/Usd has subsequently extended its rebound through 0.6600 to just over 0.6650, with the added impetus of relatively upbeat rhetoric from RBNZ Orr overnight, while Eur/Sek has retreated further from post-Riksbank peaks and back below 10.6000 as the single currency lags amidst dovish remarks from ECB’s Rehn.
AUD – Another major beneficiary of short covering and position paring in advance of US growth and PCE price gauges, as the Aussie recovers more ground from sub-0.7000 levels vs its US peer towards 0.7040, albeit still trading heavily on a Aud/Nzd cross basis under 1.0600 following weak Q1 CPI data earlier in the week that ramped up RBA easing expectations.
EUR – As noted above, the Euro has been hampered to a degree by Rehn comments adding a bit more credence to sourced reports suggesting that some GC members are inclined towards shifting guidance on rate normalisation out further than the current end of 2019 or later to a BoJ-style next year. Hence, Eur/Usd’s bounce from yesterday’s new ytd low (circa 1.1116) has been stymied ahead of 1.1150 and decent option expiries stretching to 1.1160 (1.5 bn), while residual bids above 1.1100 may also be supplemented by hedging or buying interest linked to a total of 1 bn running off at the strike.
GBP/CHF/CAD/JPY – All narrowly mixed vs the Usd as Cable pivots 1.2900 awaiting more Brexit developments and eyeing next week’s super BoE Thursday, while the Franc continues to straddle 1.0200 and meander between 1.1375-50 against the single currency in wake of yet another reminder from the SNB that NIRP and FX intervention are still warranted. The Loonie is still managing to hold above post-BoC lows and above 1.3500 even though crude prices are recoiling further from best levels in the run up to Canadian budget balances for February. Elsewhere, Usd/Jpy remains rangebound below 112.00 and just over chart support sub-111.40 in the form of the 30 DMA and a 61.8% Fib (at 111.37 to be precise), with the upside also capped by 1.1 bn option expiries from 112.00-20, and the impending long Japanese holiday still drawing attention as a potential hazard given the so called flash crash in currency and other markets when Japan was absent earlier this year.
EM – A double-whammy for the Rouble on the aforementioned pronounced downturn in oil and with speculation that the CBR could take a lead from other Central Banks along a dovish policy path. Usd/Rub currently trading closer to the top of 64.8310-5630 parameters.
In commodities, Brent (-1.3%) and WTI (-1.3%) prices are firmly in the red with prices dropping below the USD 75/bbl and USD 65/bbl levels; notably, Brent had only reached the USD 75/bbl level yesterday for the first time this year. Iran’s crude oil exports from their Southern Ports have reportedly increased so far in April to 3.56mln BPD; specifically, regarding the Iranian oil waivers, Turkey are attempting to convince the US to allow Turpas to continue the purchase of oil from Iran. For reference, under the import waivers Turkey was permitted to import around 60kBPD of oil from Iran, and in December a total of around 54k BPD of oil was imported by Turkey from Iran. Elsewhere, following reports that a number of refineries had suspended the import of Russian oil from the Druzhba pipeline (1.2mln BPD) due to contamination issues, Russia has stated that the issues will be resolved from April 29th. However, reports indicate that some of the refineries that have suspended imports believe the problem will continue for another one or two weeks. Gold (+0.4%) prices have gradually moved higher across the session, benefitting from the cautious risk tone and concern ahead of Japan’s Golden Week holiday where markets will be closed for 10-days. Elsewhere, due to the softer dollar ahead of today’s GDP data, metal prices have retraced some of the prior session’s losses; and there were reports this morning of an explosion at Port Talbot, which is the UK’s largest steelworks. Tata Steel, who own the site, stated that there were no serious injuries and an investigation is ongoing.
US Event Calendar
8:30am: GDP Annualized QoQ, est. 2.3%, prior 2.2%
8:30am: Personal Consumption, est. 1.0%, prior 2.5%
8:30am: Core PCE QoQ, est. 1.4%, prior 1.8%
10am: U. of Mich. Sentiment, est. 97, prior 96.9; Current Conditions, prior 114.2; Expectations, prior 85.8
DB’s Craig Nicol concludes the overnight wrap
If the baton started with US equity markets hitting fresh record highs this week and then passed to the bond market on Wednesday, then it was the turn of EM to run the anchor leg yesterday following a day of relatively wild price action across assets.
Indeed broad EM FX slid as much as -0.59% before buyers stepped in during the New York session, arresting the broad declines and leaving the index close to flat by the end of play yesterday. A modest -0.04% decline was however still good for the fourth consecutive daily drop, with the index now down in 8 out of the last 10 sessions. Over that period, it has fallen -1.76%.Of the 24 most active EM currencies, 20 weakened versus the USD. This did however mask bigger declines for the likes of the Argentinian Peso (-2.43%) – which hit a new record low – and the Turkish Lira (-0.92%) which closed at 5.928 and the weakest since last October.In fact it was a rough day for assets in both of the countries. The Argentinian and Turkish equity markets dropped -0.64% and -1.71%, respectively, and 5y CDS spreads widened +26bps and +22bps. 10y hard currency bond yields rose 19.1bps in Turkey, but, somewhat puzzlingly and inconsistently with the action in other asset classes, 10y hard currency yields rallied off their intraday peaks to actually close -20.4bps lower in Argentina, completing an intraday swing of 72.3bps. More broadly the MSCI EM index closed -0.16% after trading down as much as -0.94% and this week has dropped -1.91%. That compares to a gain of +0.73% for the S&P 500. US HY spreads are a modest +3.3bps wider this week so there’s been little sign of the EM move spreading to credit so far.
That four-day move for the S&P 500 included a small -0.04% decline yesterday. In fairness there were some reasonable divergences on Wall Street yesterday with the NASDAQ (+0.21%) getting a boost from those Facebook and Microsoft results, while the DOW (-0.51%) got hit almost entirely due to a -12.95% drop for 3M following a disappointing set of results.Meanwhile the USD – which has been part of the reason for the weakness across EM recently – did at least ease off yesterday, closing flat. Treasuries also had a quieter day with 10y yields creeping up +1.4bps.
It’s worth jumping straight to Asia now where this morning the EM pain has seemingly hit the Nikkei (-0.68%), Shanghai Comp (-0.78%) and Kospi (-0.52%),with only the Hang Seng (+0.11%) posting a gain. Weak March industrial production data in Japan (-0.9% mom vs. +0.0% expected) is also playing a role. Asian FX is hanging in a little better, while the CNY (+0.12%) is slightly stronger after following a stronger than expected fix. President Xi Jinping also reiterated China’s commitment to keeping the currency stable by saying that China won’t engage in currency depreciation that harms other countries. Generally it’s the PBoC that make comments like this so it’s perhaps significant to come directly from the President, especially as he is chairing a number of economic committees.
Overnight, Bloomberg has also reported that the White House might concede to a Chinese proposal that would give less protection for the US pharma products in China (proposed 8 years) than they receive at home (12 years and new NAFTA 10 years). Elsewhere, Japan’s Finance Minister Taro Aso met with the US Treasury Secretary Steven Mnuchin as part of the ongoing trade talks with the US and said that Japan can’t agree to any talk of linking currency and trade policy while a Japanese Finance Ministry official said that he believes that talks concerning currency will be secondary to the trade talks between Economy Minister Toshimitsu Motegi and Lighthizer. President Trump and Japanese Prime Minister Shinzo Abe are due to meet today and are expected to discuss trade amongst other issues.
Turning back to yesterday’s US earnings, the highlights were a strong report by Amazon and a weak one from Intel. Amazon – who’s shares traded up just over 1% in extended trading – showed first quarter profits far above expectations, at $7.09 per share versus Bloomberg consensus expectation for $4.67, while revenues also grew strongly including a +47% gain in sales by Amazon Web Services, their cloud computing business. Strength in the same business line had boosted Microsoft earlier this week, with the software giant floating above a $1 trillion market capitalization in intraday trading before retreating slightly below that level. Intel – who’s shares dropped over 7% in extended trading – reported a 2.3% beat on profits, but lowered their full-year guidance markedly. Management now expects 2019 revenues to be around $69 billion, below consensus expectations for $71 billion. NASDAQ futures are little changed overnight as a result.
Back to yesterday and specifically some of the idiosyncratic stories in Turkey and Argentina. The Turkish Lira really got moving post the Central Bank of Turkey meeting where, although policy was left unchanged, the Bank dropped a commitment to tighten policy further if needed, saying that the action “will be determined to keep inflation in line with the targeted path”. By the way, inflation in Turkey is running just below 20%. Meanwhile in Argentina the story appears to be one of a negative feedback look between political uncertainty, out of control inflation, and the weakening Peso.The closing level on Argentina’s 5y CDS yesterday now implies a 59% probability of default. Bonds maturing in 2 years were at one stage yielding over 20% yesterday. Back in February the same bonds were trading at ‘just’ 8%.
A reminder that it was declining EM growth expectations last year which eventually filtered through to weakness in broader DM markets, so it’s worth seeing if we get a continuation of this price action in the near term.
In the meantime it’s likely that today’s first look at Q1 GDP for the US will do nothing but highlight the DM/EM growth divergence. Our economists expect a +2.6% qoq/saar reading (full preview here ) which is above the market consensus of +2.3%. For what it’s worth the range of expectations for that consensus reading is from as low as +1.0% to as high at +2.9%, with the Atlanta Fed’s tracker at +2.7%. A reminder that Q4 came in at +2.2%. The last piece of data which could have helped fine-tune today’s growth expectations – the preliminary March durable and capital goods orders data – came in above market. Core capex orders printed at +1.3% mom versus expectations for +0.2% while durable orders ex transport rose +0.4% mom (vs. +0.2% expected). Both series were also revised higher in prior months as well.
The other data that was released yesterday included the latest weekly claims reading which revealed a surprisingly 37k uptick to 230k (vs. 200k expected).However, one-offs appeared to be in play again with strikes at New England supermarkets flagged as a reason behind the spike. Lastly the Kansas City Fed manufacturing survey for April fell to 5 from 10, remaining in positive territory for the 29thconsecutive month, the longest streak since February 2008.
In Europe there were no data releases with earnings still the main driver.Swedish industrial firm Atlas Copco (+5.01%) reported strong first quarter figures including surprisingly high new orders. Bank earnings were hit or miss, as UBS (+1.23%) gained but Barclays (-3.59%) lagged. The former attracted new inflows and announced the resumption of its buyback program, while the latter reported softer-than-expected figures for both its revenues and capital ratio. Spanish utilities firm Iberdrola (+4.30%) also outperformed after profits grew 12%, which explained just about all of the IBEX’s gain yesterday, as the index advanced +0.47% while the DAX and CAC slid -0.25% and -0.33%, respectively. Italy’s benchmark index traded flat, but BTP yields rose +5.5bps, possibly reflecting some anxieties ahead of today’s S&P ratings review.
Elsewhere in Europe, the Swedish Riksbank was the latest central bank to strike a surprisingly dovish tone, sending the krona to its weakest level versus the dollar since 2002.The central bank noted softer inflation and the weaker outlook for employment, and opened the door to the possibility that they do not hike rates at all this year, whereas the market had priced in one hike. Somewhat in parallel, ECB Vice President de Guindos said that he “cannot be super optimistic” about the European economy, which helped the euro to a -0.21% loss versus the dollar.
Over in the US, former Vice President Joe Biden officially launched his presidential campaign yesterday. He is viewed as more moderate than most of the rest of the Democratic field and has consistently polled at the top of the pack. It remains to be seen if he can maintain his initial strong position as the grind of the campaign accelerates.
Looking at the full day ahead, this morning the only data of note is more CBI survey data out of the UK. The focus then turns to that Q1 GDP print in the US while the final April University of Michigan consumer sentiment survey revisions follows. Away from that GDP print in the US the other potentially market sensitive event is a meeting between Japanese PM Abe and President Trump at the White House. Russian President Putin is also travelling to China to meet with President Xi Jinping while the earnings highlights include Exxon Mobil, Chevron, Total and Sanofi. Finally, S&P are due to complete their review of Italy’s BBB/Negative credit rating today.
In its latest regulatory filing, Uber has confirmed a leak published late last night by the Wall Street Journal that the world’s most valuable ‘unicorn’ has once again lowered its valuation ahead of its upcoming IPO, a sign that the post-debut struggles of Uber’s smaller rival, Lyft, have put a meaningful dent in expected demand.
According to a Bloomberg report on the filing, Uber is hoping to raise $9 billion in its IPO, which would leave the company with a total valuation of $91.5 billion on a fully-diluted basis, which incorporates all warrants, options and restricted shares granted to private backers and company insiders.
Uber will offer 180 million shares at between $44 and $50 each, down from an earlier range of $48 to $55 that it had cited in documentation provided to holders of the company’s convertible notes. Uber’s debut on the NYSE next month is expected to be the biggest in a year where many of the hottest Silicon Valley ‘unicorns’ – companies like Slack and Airbnb – are expected to finally go public. Already, Lyft, Pinterest and Zoom Communications have held closely watched initial offerings, though the outcome has been decidedly mixed, as investors have finally started to second-guess valuations that appear entirely divorced from fundamentals.
Though the valuation range is far lower than the $120 billion that investment bankers had once pitched to Uber’s management, a debut within this range would still make Uber’s one of the ten largest US IPOs in history – and the largest on a US exchange since Alibaba’s 2014 IPO, where the Chinese tech and e-commerce behemoth raked in $25 billion. Lyft’s sale of $2.34 billion in stock at its offering has been the biggest of the year so far.
Uber plans to price its IPO on May 9. That means shares will likely start trading the following day (May 10), which is a Friday. According to Bloomberg, the company will embark on its pre-IPO roadshow on Friday with meetings in New York. The rest of the schedule is as follows: