Wall Street Breakfast: Markets Prepare For Week Of Central Bank Decisions

7 comments  |  Includes: ALU, CGEMY, CMG, DB, IGTE, KO, MFG, MSFT, NOK, QCO

Economy
Interest rates won't be moving higher after the FOMC's meeting this week, but investors will still be watching the language of the statement for signs on when such a rate hike might be expected. Also on tap for Wednesday is the preliminary first-quarter readout of GDP, along with some early April economic reports. The spotlight in Asia this week falls on Japan, where a flurry of data releases and a central bank decision could provide clarity on the direction of the world's third largest economy.

Following its meeting, the Bank of Japan is expected to cut its 2015 inflation forecast by several tenths of a percentage point from 1%, and shave its growth forecast from the current 2.1%, FT reports. Despite inflation dropping back to zero, governor Haruhiko Kuroda has argued strongly that the BOJ's existing QE program is on track, leading many economists to think further easing is unlikely for now.

Red-hot mainland Chinese shares soared again today, propelling the Shanghai Composite Index up 3.1% (+39% YTD) to its highest level since late 2007. "Funds of various mandates are underweight the market in a range of 140-600bp, and thus have marked benchmark stress and a need to raise exposure to China," Goldman Sachs said in a note, citing EPFR data. "With active fund managers still underexposed to the market, the rally isn't over."

The finance ministers of Slovenia and Germany on Saturday acknowledged for the first time that they are considering plans on what to do if a Greek deal is not reached by the end of June, breaking their long-held stance of insisting that the country must stay in the eurozone. The issue of a "Plan B" was raised during Friday's Eurogroup meeting in Riga, where Athens was strongly criticized for delaying the list of reforms needed to unlock its next round of funding.

As the monetary easing by central banks across the globe keep yields at rock-bottom, investment officers predict that Japanese demand for U.S. debt won't ease up in the months ahead given the lack of alternatives. Japanese life insurers - some of the world’s largest institutional investors - plan to keep pouring money into U.S. debt this year, WSJ reports, outlining that Japan even overtook China in Q1 as the largest foreign holder of U.S. Treasurys. While the current 2% yield on the U.S. 10-year is a far cry from yields of 5% or more before the financial crisis, it is still miles apart from the 0.16% yield on German bunds and the 0.29% yield on the 10-year Japanese equivalent.

Stocks
Outlining its "next phase of strategy," Deutsche Bank (NYSE:DB) announced its much-anticipated strategic overhaul this morning, designed to close the gap with rivals for profitability and capital adequacy. The German lender said it would target €3.5B in annual savings by scaling back its investment bank and retail operations, floating a majority stake in Postbank and increasing automation. Yesterday, Deutsche said hefty legal charges (including its recent $2.5B Libor settlement) halved its first-quarter net profit to around €559M. DB -4% premarket.

Royal Bank of Scotland has sold another portfolio of North American loans to Mizuho Financial Group (NYSE:MFG), as it continues to sell off international assets to focus on domestic lending. The agreement swaps $5.6B of loan commitments for $500M in cash, generating an overall disposal loss of around $30M. Back in February, RBS (NYSE:RBS) agreed to sell different U.S. and Canadian loan commitments to Mizuho under a deal worth $3B, marking the biggest move overseas by one of Japan's top banks.

Wall Street Breakfast: Where's The Value These Days?

|  18 comments  |  Includes: AAPL, ABT, ABX, AEC, AGI, AMZN, ANGI, APC, ARRS, ASML

Economy

China's factory activity declined at its fastest pace in a year, according to HSBC/Markit's Purchasing Managers Index. PMI fell to 49.2 (est. 49.6) in April, beneath the 50-point watermark that separates growth from a contraction. In Japan, manufacturing fell to 49.7 (est. 50.8), dropping below 50 for the first time since July 2014.

Stocks ended higher Wednesday after a steady advance, with the Nasdaq finishing fewer than 15 points away from its all-time high, lifted by better than expected earnings and an upbeat report on the housing market. All 10 S&P sectors registered gains, with tech (+1.1%) leading the way.

Gold tumbled to its sharpest single-session loss in more than six weeks Wednesday after strong U.S. existing home sales raised expectations for a Fed interest rate hike in June. Gold futures fell $16.20 (-1.4%) to settle at $1,186.90/oz., while silver fell 1.3% to $15.77. Metal miners fell in sympathy:ABX -3.4%, AU -4%, GG -2.8%, SBGL -6.8%, GOLD -1.5%, AUY -3.7%, NG-1.9%, GFI -5%, SLW -2.1%, PAAS -3.5%, NEM -3.1%, EGO -1.4%, RGLD-2.1%, FNV -3.4%, KGC -1.7%, IAG -4.1%, BTG -2.5%, HL -3.8%, AGI-5.4%, AUQ -4.4%.

Boston Fed chief Eric Rosengren cautioned that weak growth data could delay interest rate hikes. "There has definitely been a weakness to the tone of the data. The employment report was weak. That was little bit of a surprise... Certainly what is happening globally with Greece and China would indicate that there may be more softness elsewhere in the world than we might have anticipated a few months ago. That is not a particularly positive development."

Now might be a good time for U.S. investors to pick up relatively cheap overseas assets, Research Associates' Michele Mazzoleni says. People are buying dollars in anticipation of higher U.S. rates, but there is no certainty, and some Fed officials appear to be having misgivings about tightening policy too soon, in part due to the strong dollar.

Existing homes sold at the fastest pace in 18 months in March - a seasonally adjusted annualized rate of 5.19M, up 6.1% from February and 10.4% from a year ago. The median existing-home price of $212.1K is up 7.8% Y/Y.

22% of hybrid and electric car owners trading in this year opted to go for a SUV, up from 18.8% a year ago and 11.9% three years ago, as lower gas prices shift the breakeven point. The rate at which hybrid and EV car owners bought another green car fell below 50%.

What's value these days? "We have consumer staples (NYSEARCA:XLP) and healthcare stocks (NYSEARCA:XLV) trading on average at 20x earnings and five times book value - while these stocks aren’t often thought of as value, they actually comprise 20% of the Russell 1000 Value (NYSEARCA:IWB) index," Richard Pzena said on the company's (NYSE:PZN) earnings call yesterday. Add REITs and utilities to the mix and it's pretty hard to call that value index "value" anymore. "The natural question: Is it different this time? Does this era of low interest rates presage something permanently different... We believe that the odds of such an outcome are low." Pzena presumably remains bullish on the large-cap financial sector names (NYSEARCA:XLF) which continue to be weighed down by ZIRP.

Stocks

The FCC recommended that the proposed Comcast (NASDAQ:CMCSA)/Time Warner Cable (NYSE:TWC) merger undergo a hearing, seen by some as a "deal-killer." A hearing would put the merger in the hands of an administrative law judge, a strong sign the FCC doesn't see the merger to be in the public interest.

Shares of NCR jumped 6% in post-market trading following a report it (NYSE:NCR) is exploring strategic alternatives such as asset divestitures, buybacks, and a dividend; a full sale of the company is a less likely option. The report comes two months after activist Jana Partners disclosed a 7.1% stake and ahead of NCR's April 28 Q1 report.

Less than three years after striking a deal to buy Motorola Home for $2.35B, Arris (NASDAQ:ARRS) announced it's buying U.K. set-top hardware/software provider Pace (OTC:PCMXF) for $2.1B in cash and stock. Pace shareholders will own 24% of the post-merger company. The fragmented nature of the global set-top industry could help secure regulatory approval. The deal is expected to close in late 2015. ARRS +28% AH.