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Good Morning Europe
Six years on from the depths of financial crisis and there’s still nothing like the prospect of central bank stimulus to lift global stock market spirits.
Hopes that the European Central Bank might step up its bond buying efforts were spurred Tuesday by wire reports, and, despite a corporate earnings season that has been so-so at best, Wall Street turned in one of its best one-day performances of the year so far.
Asia has already enjoyed a pretty perky session, too, and European bull are expected to join in from the bell, although futures markets aren’t suggesting huge upside.
Market Snapshot: U.S. markets (Tuesday close): DJIA up 1.3%, S&P 500 up 2%, Nasdaq up 2.4%%. Nikkei now up 1.9%. December FTSE and S&P both flat. Brent crude up 16 cents at $86.38 Gold down $3.30 at $1248.40. EUR/USD now at $1.2725. USD/JPY at ¥107.03. Ten-year T-note yields 2.21%, Bund 0.83% and Gilt 2.17%.
Watch For: The Minutes from the Bank of England’s October policy conclave, U.S. CPI for September.
What you may have missed from MoneyBeat:
UKFI Bosses Give Fresh Details on RBS Sale: The former investment bankers responsible for managing the U.K. government’s 80% stake in Royal Bank of Scotland PLC on Tuesday provided new details of plans to re-privatize the holding.
J.P. Morgan Continues to Play the Host at LME Week: J.P. Morgan isn’t done with commodities. Yes, it may have made a high-profile push to sell its physical commodities business this year, but the Wall Street bank was one of a handful of hosts to hold court during the annual LME week gathering of the metals and mining industry in London this week in a clear sign it intends to remain engaged in the sector.
Is This Crunch Time for Base Metals?: Anyone investing in industrial metals needs to be patient. Copper, nickel, zinc and tin are likely to suffer low prices for some time yet, traders and analysts warn, though many are hopeful they’ll hit a floor soon.
Why Markets Hang on Data from China and the U.S.: Here’s a chart from Deutsche Bank’s economics team that tells you everything you need to know about why markets are so sensitive to every piece of data out of the U.S. and China.
UBS Reshuffles Leveraged Finance Team: UBS AG has named Brendan Dillon and Francisco Pinto-Leite joint global heads of leveraged finance and leveraged capital markets, according to an internal memo seed by The Wall Street Journal.
Global Banks Slashed Lending to Ukraine, Endangering a Recovery: The world’s banks tightened the purse strings on Ukraine in the middle of its conflict with Russia this year, endangering the country’s ability to work its way out of a deepening economic crisis.
The British Economy Has a Soft Underbelly: There’s less to the Great British economic miracle than meets the eye. A focus on the speed at which U.K. unemployment has been falling and the fact that the recovery appears firmly on track misses some serious questions about the state of public finances.
Coke’s Worst Day in Six Years: Coke shares have lost some of their fizz. Coca-Cola Co.’s disappointing quarterly results and downbeat outlook prompted the stock to tumble more than 6% on Tuesday, its worst performance in six years.
EU Proposal Deems Buyouts Less Risky Than Hedge Funds: Private equity funds are less risky than hedge funds, according to proposed European Union rules, which set out how much capital insurers need to keep in reserve to invest in different asset classes.
Energy Journal: China Data Provide a Boost: China has surprised oil markets in more ways than one Tuesday. The country’s third-quarter gross domestic product rose 7.3% compared with the year-earlier period, exceeding market expectations of 7.2%, pushing oil prices higher.
Total to Select New CEO Wednesday: Total is expected Wednesday to name a successor to CEO Christophe de Margerie, who died in a Moscow plane crash. He moved the company away from Europe’s aging oil fields to riskier, resource-rich nations.
New York Fed Faulted in ‘London Whale’ Case: Regulator failed to examine J.P. Morgan unit ahead of trading losses, watchdog says.
European Bankers Broadcast Stress-Test Messages: Europe’s banks will get the results of a key health check Sunday and many executives are looking to pre-empt surprises ahead of the outcome of the so-called stress tests.
Luxembourg Tax Deals Under Pressure: Confidential arrangements for multinational companies like Amazon and Fiat save taxes but now are under pressure from the EU.
Market Snap: At the New York close: S&P 500 up 2% at 1941.28. DJIA up 1.3% at 16614.81. Nasdaq Comp up 2.4% at 4419.48. Treasury yields rose; 10-year at 2.206%. Nymex crude oil up 0.1% at $82.81. Gold up 0.6% at $1,251.00/ounce.
How We Got Here: Well, racing fans, it was looking very dire as dawn was breaking in New York. China’s GDP had come in, and sent a chill through the markets. Dow futures were down about 120, and it appeared that last week’s sell-off was about to resume. Then things changed, on a dime.
Then reports broke that the ECB was mulling a program of buying corporate bonds, and that a decision could be made as early as December. Faster than you could say Jens Weidmann, the market turned around completely. Sellers were buyers, and buyers were buying just about everything.
The final result was that U.S. stocks put in their best day of 2014. For the Dow and S&P 500, it was their biggest one-day gains, in percentage terms, since October 2013. For the S&P, it was the biggest one-day point gain since November 2011.
Since last week, we’ve seen U.S. stocks sparked by talk of either QE4 or a delay to the end of QE3. We’ve seen the Nikkei surge 4% on a suggestion the Japanese government’s pension fund may boost its equities holdings to 25%. Now a suggestion from the ECB that is may buy corporate debt sets off the latest wave of the rally.
Coming Up: Australia will unveil its third-quarter consumer price index data on Wednesday. (In the second quarter, Australia had a 3% annual inflation rate.) Despite the slump in its economy and deflationary forces elsewhere in the world, Australia still produces inflation readings above those of the rest of the world. That doesn’t seem to faze the Reserve Bank too much but it’s one of those factors keeping its interest rates more firmly in positive territory than those of the U.S. or Europe.What You Missed Overnight
U.S. Stocks Surge U.S. stocks rallied Tuesday, with gains in technology stocks propelling the Nasdaq Composite to its biggest one-day percentage jump since January 2013.
Yahoo Profits Jump on Alibaba Proceeds Yahoo reported a slight increase in revenue, helped in part by growth in its mobile business, sending shares higher and easing for now the pressure facing chief executive Marissa Mayer.
McDonald’s Profit Plunges on U.S., China Woes McDonald’s outlined plans for what it called fundamental changes to its business as it reported one of its worst quarterly profit declines in years driven by problems in nearly every major part of its business.
Global Growth Woes Threaten to Beset U.S. Economy The specter of deflation in Europe and a slowdown in China and other emerging markets are threatening to hobble the U.S. economy at a time when the world could use a reliable growth engine.
ECB Considering Corporate-Bond Buys The European Central Bank is considering purchasing corporate bonds as an option if it concludes that more aggressive measures are needed to pump additional money into the eurozone’s fragile economy and raise inflation from its superlow levels, according to people familiar with the matter.From The Wall Street Journal Asia
Apple’s iCloud Service Under Attack in Mainland China Apple’s iCloud service for users in mainland China has been hit by an attack that could allow perpetrators to intercept and see usernames, passwords and other personal data, activists and security analysts said.
Investors in Japanese Property Look Beyond Tokyo When it costs nearly $2 billion to buy just part of a building in a prime Tokyo location, it is no wonder some investors in Japanese property are looking farther afield.
China’s Slowdown Raises Pressure on Beijing to Spur Growth China’s economic slowdown is widely expected to continue into next year, increasing pressure on Beijing leaders to take more-strenuous growth-spurring measures and to continue moving slowly on their plans for fundamental economic reform.
Xi Sends Mixed Signals on Rule of Law Some two years into his tenure, Mr. Xi is on a quest to find a new moral and ethical foundation for what he calls this “great revival of the Chinese nation,” and that mission is taking him deep into Chinese history and tradition.From MoneyBeat
Why Markets Hang on Data from China and the U.S. China and the U.S. will together contribute almost three times as much to growth in global GDP than the combined contribution of the United Kingdom, Japan, Germany, Canada, France and Italy, the six next biggest developed economies after the U.S.
Eurozone Risk to U.S.: Low Inflation More Than Weak Growth Federal Reserve officials have said the latest round of soft eurozone economic data is not enough to worry them about the U.S. outlook – or revise their fairly optimistic forecasts in the months ahead.
Morgan Stanley Likes U.S. Treasurys Over German Bunds U.S. Treasury prices are near their loftiest levels in more than a year, but Morgan Stanley thinks there is still room for them to gain.
Is This Crunch Time for Base Metals? Anyone investing in industrial metals needs to be patient. Copper, nickel, zinc and tin are likely to suffer low prices for some time yet, traders and analysts warn, though many are hopeful they’ll hit a floor soon.
Apple Pay Threatens a Competing Approach to Simplifying Payments Apple Pay went live this week, casting a shadow over the future of cash and credit cards—and of two young companies called Coin and Plastc.
Jho Low, the scion of a wealthy Asian family, has launched his most audacious bid yet: a €1.7 billion, or roughly $2.2 billion, offer to purchase Reebok from Adidas AG, according to people familiar with the brand.
While the quest to buy Reebok is Mr. Low’s highest-profile effort yet, it’s not the largest one he’s been part of.
Here’s a look at some of the biggest deals of Mr. Low, who was featured in a Wall Street Journal profile:
Before Mr. Low invested through Jynwel Capital, which was formed in 2010, he invested some of his own wealth and on behalf of friends and family in a fund known as the Wynton Group.
The first big transaction of Mr. Low’s career came in 2006. Mr. Low, who was born in Malaysia and lived there through his teen years, helped the Kuwait Finance House purchase a luxury high-rise apartment building known as the Oval in Kuala Lumpur for $87 million. The Kuwaiti bank sold the building less than two years later for a profit of nearly $20 million, Mr. Low said.
With that success, Mr. Low was quickly off and running. The following year he helped Abu Dhabi’s Mubadala Development Co. source its first real-estate investment project out of the United Arab Emirates, an $1.2 billion business and real-estate development in Malaysia. On its website, Mubadala calls Iskandar Holding, a 20-year project, “the largest single development yet undertaken in the region.”
In 2009, through his family’s trust, Mr. Low purchased the L’Ermitage Beverly Hills, a luxury hotel in Los Angeles. Between 2010 and 2012, his fund acquired half of L’Ermitage’s management group, the Viceroy Hotel Group. Once again he was joining forces with Mubadala, whose real-estate and hospitality group previously had purchased a stake in Viceroy. The group operates 16 luxury hotels on four continents.
In 2012, the Jynwel Group, as part of a group led by Sony Corp. purchased EMI’s music publishing business for $2.2 billion. With this deal, he became part of a group that controlled what the WSJ described as the largest music-publishing empire in the world with rights to 251 Beatles songs, as well as certain Jay-Z, Norah Jones and Arcade Fire songs. In addition to Sony, Jynwel partnered with Michael Jackson’s estate, Mubadala, a division of the Blackstone Group and David Geffen.
In 2013, Jynwel was part of a consortium that purchased the Park Lane Hotel that overlooks Central Park for roughly $660 million with the Witkoff Group, a New York-based real estate investment firm.
Shortly after that, Mr. Low’s fund participated in the takeover of Coastal Energy, an-oil-and gas exploration company with projects in Southeast Asia, for $2.2 billion in 2014.
Mr. Low has also become known for making big-ticket philanthropic commitments. In the past year, he’s committed $50 million to the MD Anderson Cancer Center and $20 million to Panthera, a fund dedicated to preserving the world’s wildcat population.
Now Mr. Low’s real test is whether he can convince Adidas’s board to let him buy Reebok, which Adidas purchased in 2006 for roughly $3.8 billion (€3 billion).
WASHINGTON — U.S. regulators imposed new rules on a nearly $350 billion market for loans to U.S. companies, rejecting industry-led pleas for relief.
On Tuesday, three regulators approved new rules aimed at preventing the kind of lax loan underwriting that exacerbated the financial crisis.
The so-called risk-retention rules will impact companies who manage or arrange collateralized loan obligations, or CLOs, mandating that they retain some of the loans’ risk on their books.
In a collateralized loan obligation, a company that generally has a lower credit rating gets a loan from a group of banks, known as a syndicated loan. CLO managers buy pieces of these loans, pool them together into a CLO, and then sell slices of debt to investors.
On Tuesday, the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Federal Housing Finance Agency finalized rules requiring managers who put together CLOs for investors to retain a 5% interest in the loans underlying the securities. Three more agencies are expected to approve the rule later in the week.
Regulators rejected an industry proposal that would subject high quality CLOs to a less-stringent risk-retention requirement. The proposal “will help ensure high quality underwriting of assets” purchased by CLOs and ensure that risk-retention is meaningful, regulators said in a summary of their rule.
Investors are lured to CLOs as they typically offer higher returns than corporate bonds and other loans.
The rule will provide a sizeable exemption for securities backed by mortgages, which fueled the 2008 financial crisis but will impose stringent requirements on a category of loans that were not connected to the crisis, said Bram Smith, executive director of the Loan Syndications and Trading Association.
The rules “will negatively impact American credit markets and make financing for U.S. companies more expensive and scarce,” Mr. Smith said. He pledged to “explore all options to address its harmful effects.”
AbbVie Inc.’s retreat last week from its planned takeover of Dublin’s Shire PLC, in response to Treasury rules that reduced the ease and profitability of such cross-border “inversion ” mergers, suggests the rules are creating corporate tax haves and have nots.
The new rules have effectively drawn a line in the sand, analysts say, leading to an uneven playing field in which companies that shifted to foreign domiciles before the rules were announced, September 22, enjoy financial advantages over companies that didn’t. Though many sensed such a divide when the rules were announced, AbbVie’s about-face is seen as evidence of their potency. AbbVie’s Shire takeover would have been the biggest deal of the year.
“What the new rules have done is grandfather in an entire class of companies that have a structural tax advantage their competitors can’t compete with,” said Chris Krueger, a senior policy analyst at Guggenheim Securities LLC.
A Treasury spokeswoman said the actions were not “intended to target any specific deal, but instead were in response to an increasing number of such transactions” across many industries.
With inversions, a U.S. company buys a foreign target and then moves its tax residence overseas, to a lower-tax country. The Treasury Department’s actions, targeting five sections of the U.S. tax code, placed tighter restrictions on an inverted company’s ability to access offshore cash without paying U.S. taxes. They also imposed tougher hurdles to completing such deals through a merger.
In a statement Wednesday, AbbVie called the Treasury’s actions “unilateral” and said they targeted “specifically a set of companies that would be treated differently than either other inverted companies or foreign domiciled entities.”
U.S. Secretary Treasury Jacob Lew said last month that a comprehensive business tax overhaul was the best way to address inversions. The U.S. has one of the world’s highest federal corporate tax rates, 35%.
Some analysts have pointed to Aon PLC, an insurance brokerage that reincorporated to London in 2012, as an example of the imbalance in competition. In 2011, before moving, Aon had an effective tax rate of 27.3%. The company’s tax rate dropped to 25.4% by the end of 2013, and shrunk further to 17.5% by the second quarter of 2014. Aon’s annual 10-K filing lists two U.S.-based companies among its competitors, Towers Watson and Marsh & McLennan Cos. Their 2013 effective tax rates are 31.9% and 30.1%, respectively.
An Aon representative declined to comment.
Analysts and policy followers have also indicated that the new rules make U.S. companies easier targets for cross-border takeovers, as the tax benefits of inversions can basically be gained backwards, with foreign companies buying U.S. based companies. “Non-inverted companies may now be more vulnerable to foreign acquirers, particularly because they have unresolved tax issues,” said Ed Kleinbard, former chief of staff of Congress’s Joint Committee on Taxation.
“The Treasury issued a very narrow ruling that punishes companies for wanting to leave but doesn’t prevent them,” said Martin Regalia, chief economist at the business-friendly Chamber of Commerce. “If you don’t want them to leave, you have to change the rules to encourage them to stay,” he said.
News, analysis and some curiosities to ease your commute home.
Apple’s iCloud under attack in China, putting mainland users at risk – WSJ
This what sparked today’s rally: Reuters says ECB considering corporate-bond buys – Reuters
U.S. restricts passengers from Ebola-stricken countries to flying into five airports – WSJ
My day interviewing for the service-economy startup from hell – The Billfold
A musical interlude: Joe Walsh; In the City – YouTube
Amazon’s deal with Simon & Schuster puts Hachette and Authors United in a box – Passive Voice
When Yahoo reports third quarter earnings today, the company is expected to provide details on how it is evaluating potential acquisitions it could make using the haul of cash from the Alibaba IPO. Many in the ad world have been speculating about which companies make for good Yahoo targets. Now, TechCrunch is reporting that Yahoo is in talks to acquire BrightRoll, a Web video ad exchange company, for something in the range of $700 million.
There are several reasons why this deal might make a lot of sense for Yahoo–and a few reasons Yahoo may want to be cautious. Here’s a quick analysis:
-Web video advertising is surging, and BrightRoll, which launched as a video ad network but has built out a solid video ad exchange, would put Yahoo in position to earn a bigger chunk of that market than it can on its own.
-In a way, this deal would serve as a way for Yahoo to counter AOL’s acquisition of the Web video exchange company Adap.tv last year. That acquisition has already begun to pay off for AOL. And BrightRoll’s exchange reached 51.3% of the U.S. Web population in August, versus 38.3% for AOL, according to comScore. (For those who see a Yahoo-AOL tie-up down the road, a Yahoo purchase of BrightRoll could diminish the appeal of that deal.)
-It would make Yahoo a more credible player in advertising technology, an area where it has seriously lagged behind competitors. BrightRoll’s technology is generally well-regarded.
-BrightRoll is bringing in revenue now, and Yahoo Chief Executive Marissa Mayer needs to make deals for companies that are already established in the ad world rather than those making big promises.
-Video is going “programmatic” fast. eMarketer says that 12% of video ad spending will be sold via programmatic channels this year, soaring to 40% by 2016. Programmatic advertising is right in BrightRoll’s wheelhouse.
-BrightRoll would provide Yahoo with a way to better sell it’s own video ad inventory, particularly for its fledgling video hub Yahoo Screen. Yahoo has made a big splash by going after original, TV-like series, but most of those projects won’t materialize until next year. Meanwhile, Yahoo Screen has often seemed to be light when it comes to advertising (for example, it’s library of “Saturday Night Live” clips often don’t carry ads). BrightRoll could potentially bring new advertisers and more demand to Screen.
-The deal might give Yahoo a credible way to dip its toe into selling TV, if and when that business goes programmatic. AOL has already made small inroads here with Adap.tv, and BrightRoll has already gone after that space. It’s very early days in that arena, but the potential payoff is huge.
Of course, there could be a downside to this deal:
-BrightRoll won’t solve all of Yahoo’s problems, and probably won’t totally calm investors.
-It’s increasingly competitive in the video ad world, even in programmatic. Not only is AOL making waves here, but a few months ago Google launched what it is calling a “premium video exchange.”
-Like many in the online ad network/exchange world, BrightRoll has had some problems with low quality or suspicious ad inventory. BrightRoll’s exchange is an open platform, meaning that BrightRoll does not necessarily pick and choose the inventory that gets sold there. And BrightRoll CEO Tod Sacerdoti has been open about the fact that while he encourages ad buyers to set parameters when buying ads via the exchanges to ensure inventory quality, not everyone follows that advice. AOL faced this sort of thing when it acquired Adap.tv last year, and it’s been making efforts to clean up the Adap.tv inventory supply. Yahoo may have to invest in technology to make advertisers feel comfortable with BrightRoll’s inventory quality.
Federal Reserve officials have said the latest round of soft eurozone economic data is not enough to worry them about the U.S. outlook – or revise their fairly optimistic forecasts in the months ahead.
“It’s not really a surprise that growth in Europe has been underperforming for some time,” Boston Fed President Eric Rosengren said in an interview last weekend. “It may be a little bit softer, not dramatically softer. The inflation numbers have been coming in maybe a tenth or two [of a percentage point] lower than they were expecting.”
That may be the case. But for Paul Mortier-Lee, economist at BNP Paribas, slipping inflation may be a more dangerous channel of contagion than weak growth – something that would still pose a problem for Fed officials, who have undershot their 2% inflation target for more than two years.
“The impact on inflation looks to be much more serious and should worry the Fed, in our view, as inflation expectations globally seem to have been fraying at the edges,” Mr. Mortimer-Lee writes in a research note to clients. “Thus, the U.S. will probably not catch Europe’s stagnation, but it could get a bad case of unwelcome disinflation.”
The reason, he says, is that import prices may be having a greater effect on underlying or core U.S. inflation than they have in the past.
“The evidence does suggest a stronger relationship between import prices on the core Consumer Price Index in the last two to three years,” Mr. Mortimer-Lee says.
That would worry a number of Fed officials, whose preferred measure of consumer prices, the personal consumption expenditures index or PCE, has begun drifting lower again after a brief uptick.
Or maybe not. Research from the Cleveland Fed in September found a much weaker relationship between import prices and the costs of consumer goods.
The Fed has undertaken an aggressive response to a deep recession and soft economic recovery, keeping official interest rates near zero since December 2008 and buying over $3 trillion in government and mortgage bonds to support investment and hiring.
The stock was recently down $5.51, or 21%, to $20.75, on pace for its biggest drop since 1998. The decline more than erases the past week’s 15% gain in Ocwen shares and leaves the company down more than 60% for 2014 amid a spate of inquiries by regulators.
The letter was the latest salvo from officials who have been looking into the firm’s mortgage-servicing practices. Ocwen has said it received a subpoena from the Securities and Exchange Commission in June related to the mortgage servicer’s business dealings, and New York’s Superintendent of Financial Services, Benjamin Lawsky, is investigating whether the firm’s mortgage-servicing practices are unfair to homeowners, particularly those in distress.
The latest letter from Mr. Lawsky said that even after an Ocwen employee discovered and reported the backdating, Ocwen ignored it for months and still hasn’t corrected it, nearly a year after it was found. By backdating correspondence with homeowners in in financial straits, Ocwen could potentially avoid making mortgage modifications.
Ocwen said in a statement that it regrets the errors, and said 283 borrowers in New York had received improperly dated letters.
“Ocwen Financial Corp. shares are on pace for their biggest drop since 1998 amid reports that New York’s top financial regulator has accused the mortgage-servicing company of backdating letters to borrowers,” the company said.
Last week’s financial market volatility could cost the U.S. around 8,000 jobs, according to a rough estimate published Tuesday by Renaissance Macro Research.
Neil Dutta, the firm’s head of economics, calculated the figure by relying on an analysis of global market volatility and labor markets published last month by Andrew Foerster at the Federal Reserve Bank of Kansas City.
That study examined global market volatility over the past four years and its effect on domestic job growth. The study used the Chicago Board Options Exchange Market Volatility Index, known as the VIX, to gauge stock-market volatility as a proxy for uncertainty.
The Kansas City Fed’s model suggests that large declines in the VIX index and small changes in either direction have little to no effect on employment growth. But big spikes in uncertainty—witnessed in 2010 when the European sovereign debt crisis flared and in 2011, when it surfaced together with the U.S. debt ceiling crisis—produce statistically significant declines in job growth.
Uncertainty causes firms to delay irreversible decisions such as equipment upgrades or hiring.
“As a result, sharp increases in the VIX that are reversed quickly—such as those that occurred during the recovery—may have persistent, negative effects on employment growth,” Mr. Foerster wrote.
The study concluded that those shocks had cost the U.S. an average of 16,000 jobs per month over four years.
Mr. Dutta called attention to the study Tuesday because growth worries roiled financial markets again last week, leading to a big stock selloff and sending the 10-year U.S. Treasury to its lowest level in 16 months.
The spike in the VIX index last week was about half of what it was during the large uncertainty spikes of 2010 and 2011, implying a potential drag of around 8,000 fewer jobs.
Any hit to job growth would be unwelcome. Still, U.S. payrolls have added 227,000 workers a month so far this year.
“Unexpected market volatility is bad for payrolls, but this current experience is not enough to derail the labor market recovery,” Mr. Dutta wrote.
From Europe to Ebola, fears of a global recession to fears of a global pandemic, there are enough headlines to send investors scrambling for their fox holes. But a look at market history suggests that the markets tend to handle these crises rather well.
The fact is, markets tend to rise in the aftermath of any number of crises, Marketwatch columnist Mark Hulbert said this morning on the MoneyBeat show. It’s not just recent crises, like the euro crisis or Asian Contagion. Even during the awful Spanish flu of 1918-1919 – which killed 675,000 – the stock market rose 25% during the worst 12 months of the crisis.
It doesn’t offset the human suffering from these crises, but it does point up to fact that long-term investors will withstand the market’s gyrations, convulsions, and occasional crashes.
The best time to develop an escape plan in case your house catches fire is not when you wake up and the walls are burning. By the same token, the best time to develop a plan to handle market volatility is not when the market is churning like it is now.
John Buckingham, who manages the Al Frank Fund and writes the Prudent Speculator newsletter, dropped in on the MoneyBeat desk this morning with his ideas for a broad portfolio that can help investors side-step the current volatility, as well as some of his favorite picks, and why McDonald's and Coca-Cola don’t make that cut.
U.S. Treasury prices are near their loftiest levels in more than a year, but Morgan Stanley thinks there is still room for them to gain.
The primary dealer on Tuesday says it now recommends buying 10-year U.S. Treasurys against German bunds, noting it’s “time for U.S. rates to shine cross market.”
After having steadily outperformed U.S. Treasurys over the past three years, fueled by a mix of easing by the European Central Bank and bouts of risk aversion, the 10-year German bund last week fell to a record low of 0.67%. The bund last yielded 0.86%.
Morgan Stanley said those levels reflect a bond market that’s already pricing in the ECB keeping its policy rate on hold until late 2017 and a “very high probability” of the central bank initiating government bond purchases. That means there’s little room for bunds to rally further, even if economic data disappoint. Bunds could even sell off if the ECB shows hesitance about buying sovereign bonds – a program Morgan Stanley considers to be “far from a sure thing.”
By contrast, U.S. Treasurys have plenty of scope to rally should investors expect weaker global growth and tame inflation to force the Federal Reserve to tighten policy more slowly, Morgan Stanley says.
“Going forward, we think the risks remain skewed toward U.S. Treasurys outperforming bunds,” the bank says. “If the data disappoint market expectations, then Treasurys can rally further. If data improve, bunds are just as vulnerable, or more vulnerable, to a selloff.”
Ten-year U.S. Treasurys currently yield an extra 1.35 percentage points above comparable German bunds, a premium that’s near its highest since 1999. Morgan Stanley sees that gap narrowing by 0.3 percentage point into mid-2015, forecasting a 10-year U.S. yield of 2.5% by then and 10-year German yield of 1.45%.
J.P. Morgan isn’t done with commodities.
Notwithstanding a high-profile push to sell its physical commodities business this year, the Wall Street bank was one of a handful of hosts to hold court during the annual LME week gathering of the metals and mining industry in London this week, a clear sign it intends to remain engaged in the sector.
The LME week lunch hosted by J.P. Morgan in the heart of the City of London comes just weeks after it sold part of its physical commodities business to Swiss-based trading house Mercuria Energy Group.
The smaller-than-expected $800 million deal, which completed earlier this month, didn’t include J.P. Morgan’s metals trading business, but at the time the bank did make clear that most of its physical commodities assets not included in the Mercuria deal had already been sold in separate transactions.
It also took care to emphasize that it planned to continue to be active in commodities financing, derivatives and LME warrant trading, as well as trading and storing precious metals.
Evidently, if its function in the midst of a week when London is awash with metals-focused traders, executives, media and analysts is anything to go by.
“J.P. Morgan and our heritage firms have hosted an LME week lunch event for almost three decades. Our event draws clients from dozens of countries,” said Michael Camacho, co-head of global commodities at J.P. Morgan. “It’s not only a place for our clients to meet and discuss business, but it’s an appropriate opportunity for us to demonstrate new products like our electronic trading offerings,” he added.
Still, J.P. Morgan’s exit from the physical aspect of the commodities sector is an interesting reflection of broader shifts. Many banks are finding it harder to own assets and trade physical raw materials amid increasing regulatory scrutiny and a sustained period of low volatility that has capped the profitability of trades that take advantage of price moves.
Commodities remain attractive though, particularly from a financial perspective. Many of the banks retreating from the physical business, like J.P. Morgan intend to remain involved financial side. Still others are eager to expand in the sector. For instance, Citigroup has capitalized on Deutsche Bank ’s retreat from parts of the business, snapping up the bank’s energy and metals trading books in recent months.