Wall Street Breakfast: Markets Shake Off Korea Crisis

Includes: AMZN, BCS, CBS, FB, HLT, IBM, JBSAY, M, MMTOY, MSFT, NSAN

For the second time in less than a month, Pyongyang has fired a ballistic missile that flew over Japan, prompting the UN Security Council to call an emergency meeting for today. Arms race? South Korea responded by conducting live fire drills that mimicked attacking Pyongyang's launch site, and completed its own ballistic missile test into the sea. Investors initially fled to safe havens on the news, but the yen, Swiss franc and gold have since given back all of the gains.

Economy

More sanctions talk... Secretary of State Rex Tillerson is urging China to use its leverage as North Korea's principal supplier of oil to press the isolated nation into reconsidering its development of nuclear weapons. The Trump administration has meanwhile extended U.S. sanctions relief to Iran as part of its 2015 nuclear agreement, but levied new punitive measures over Tehran's ballistic missile program, cyberattacks and terrorism.

British police are investigating a "terrorist incident" at London's Parsons Green underground station following various reports of an explosion aboard a train. FTSE 100 -1.3% to 7,203, while the pound is trading higher, up 1.4% to $1.3588. It follows sterling's gains yesterday after the Bank of England said it was likely to raise interest rates in the coming months for the first time in a decade.

Venezuela will make all pending debt payments despite "a series of difficulties" that have arisen as a result of financial sanctions by the U.S., according to Economy Vice President Ramon Lobo. In August, the Trump administration prohibited dealings in new debt from Venezuela and state oil company PDVSA in response to the creation of its new legislative superbody.

Brazilian President Michel Temer has been charged with obstruction of justice and racketeering, related to the plea-bargain testimony by executives at JBS (OTCQX:JBSAY), the world's largest meatpacker. It will now be up to the lower house of Congress to vote on whether or not the president should stand trial before the Supreme Court.

It's been back and forth for months, with President Trump hinting at times that Fed Chair Janet Yellen would be reappointed and suggesting at other times that he was looking for her successor. Aboard Air Force One on Thursday, he said: "I like her and I respect her, but I haven't made that decision yet." Yellen's tenure expires in February, after four years at the helm of the central bank.

Light, sweet crude out of Canada and North Dakota have surged to their highest levels in over four years, as Midwest and East Coast refiners bid heavily for the grades following Hurricane Harvey. The shutdowns in the U.S. Gulf have had a twofold effect on Midwest refineries: It pushed WTI to its lowest point against Brent crude in two years, cheapening Bakken and Canadian grades, and has also boosted refining margins.

Stocks

Shares of Oracle slumped 3.5% in after-hours trade after the company forecast slower growth for its cloud business. The business software maker said total cloud revenue would rise 39%-43% next quarter, down from 51% in the current period. On an adjusted basis, Oracle earned $0.62 per share in Q1, topping estimates.

Facebook's Messenger app now has 1.3B monthly users, up 30% in just over a year and rivaling the popularity of WhatsApp. The milestone comes two months after Facebook's (NASDAQ:FB) other message service said it was serving 1.3B users a month. Both platforms are in focus after the tech giant warned that ad sales growth from its News Feed product will start to wane in the second half of this year.

Angry Birds developer Rovio has priced its IPO at €10.25-€11.25 per share. The game maker's market cap is seen in the range of €802M-€896M, aiming to raise €30M through the listing. Rovio will start on the Helsinki pre-list Nasdaq exchange on Sept. 29 before graduating to the official one on Oct. 3.

In a major step for the cloud computing giant, Amazon Web Services (NASDAQ:AMZN) has a new market for its analytics and storage services. This week, the U.S. Defense Department granted the company a provisional authorization to host Impact Level 5 workloads, which are the military and Pentagon's most sensitive, unclassified information. Only two other companies, IBM and Microsoft (NASDAQ:MSFT), are able to store the material.

Lachlan Murdoch's private company has revised its takeover offer for Australia's struggling Ten Network, escalating the battle into a bidding war after CBS agreed to a buyout with the broadcaster. The new bid from Illyria raises the pool of cash payable to unsecured creditors to A$55M, higher than a pool of A$32M offered by CBS, according to documents released by Ten's administrator.

After cracking down on cryptocurrencies, China now wants a regulatory framework to support digital tokens. Li Lihui, a senior official at the National Internet Finance Association of China and former president of the PBOC, further said that global regulators should work together on digital currencies. Bitcoin plunged another 11% overnight as major Chinese exchange BTCChina announced it will stop all trading from Sept. 30.

Barclays' chief executive, under investigation for a 2016 incident, has done "a fantastic job" in restructuring the bank amid challenges like Brexit, according to the British bank's chairman. Jes Staley is being investigated by regulators regarding his individual conduct after he attempted to identify a whistle blower. He admitted to the mistake, but was still re-appointed to head Barclays (NYSE:BCS).

With instant coffee and espresso under its belt, Nestle (OTCPK:NSRGY) has acquired a majority stake in premium cold brew company Blue Bottle Coffee for a reported $425M-$500M. The acquisition is one of several recent purchases marking Nestle's foray into specialty foods and drinks, as it seeks to appeal to consumers turning away from more mass market brands.

Hilton Worldwide is aiming to personalize its bedrooms for guests using digital technology, before they arrive for their stay, including temperature control and preferred TV channels. Digitization of rooms will be the "next big thing" for the hospitality chain, declared Chief Marketing Officer Geraldine Calpin. It follows Hilton's (NYSE:HLT) "digital key" launched in 2016, which gives other pre-check in features to HHonors loyalty members.

Sign of the times? Macy's (NYSE:M) is increasing by 20% the number of workers it hires during the holiday shopping season to staff distribution and warehouses that support its online business. However, total holiday hiring will fall to 80,000 from 83,000, with Macy's operating 70 fewer stores than it did last year. According to filings, the chain will shut another 100 stores by the end of 2017.

The Renault-Nissan alliance, as well as recently acquired Mitsubishi Motors (OTC:MMTOY), has again confirmed that the future of cars is electric and autonomous. Alliance 2022, as the group calls itself, said that it plans to roll out 12 electric and 40 self-driving vehicles in the next five years. Renault (OTCPK:RNLSY) and Nissan (OTCPK:NSANY) also want to produce "robo-taxis," driverless public transport vehicles.

Thursday's Key Earnings

Oracle (NYSE:ORCL) -3.5% AH forecasting slower cloud growth.

Today's Markets 

In Asia, Japan +0.5%. Hong Kong +0.1%. China -0.5%. India +0.1%. 
In Europe, at midday, London -1.3%. Paris -0.1%. Frankfurt -0.1%. 
Futures at 6:20, Dow flat. S&P -0.1%. Nasdaq -0.1%. Crude -0.1% to $49.82. Gold -0.1% to $1327.70. 
Ten-year Treasury Yield flat at 2.2%

Today's Economic Calendar

8:30 Retail Sales
8:30 Empire State Mfg Survey
9:15 Industrial Production
10:00 Business Inventories
10:00 Consumer Sentiment
1:00 PM Baker-Hughes Rig Count

Companies reporting earnings today »

Source: https://goo.gl/wrBiVk

Weighing The Week Ahead: What The Trump-Xi Meeting Means For The Economy

About: SPDR S&P 500 Trust ETF (SPY), QQQ, DIA, SH, IWM, TZA, SSO, TN

Summary

Last week's slightly positive news was less important than optimism about the next element of the Trump agenda.

Next week features plenty of data, including the most important reports.

More important, and the focus for many newly-minted China experts, will be the meeting between Presidents Trump and Xi.

Plenty of good trades and investments might be available.

Lessons from the meeting should emphasize Trump diplomacy, not just specific deals with China.

We have a big economic calendar and potential Fed news. Those stories will take a back burner this week. My safest prediction is that we are about to see a new rash of China experts both in print media and on CNBC! These freshly-minted pundits will be asking:

What will the Trump-Xi meeting mean for the economy, and for stocks?

Last Week

Last week the news was mostly positive, but light. Markets continued the attention to the Trump Administration's next policy steps – especially the chances for tax reform.

Theme Recap

In my last WTWA I predicted a discussion about the aftermath of the ACA repeal decision. That was a good call, as assorted pundits explained what the next policy moves might be. The more adventurous speculated about whether the Freedom caucus would block changes in the debt ceiling or tax reform. Some of that discussion will continue in the early part of next week.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the overall weekly gain of 0.80% and the quarter one increase of 5.5%. The biggest takeaway might be the general rebound from last week's market reaction to the failure of the ACA repeal.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

The News

Each week I break down events into good and bad. Often there is an "ugly" and on rare occasion something very positive. My working definition of "good" has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

This week's news was slightly positive.

The Good

• Hotel occupancy is strong. Calculated Risk reports interesting hard data from private sources. These are items you might not see elsewhere.

• Household finances are on "solid ground" as explained by Scott Grannis. Debt levels as a percentage of disposable income are at 30-year lows. He provides an interesting chart of household leverage.

• Serious delinquencies have declined to 1.19% (Fannie Mae via Calculated Risk). This is the lowest level in nine years.
• Corporate profits remain strong, increasing 9.3% year-over-year in Q416. New Deal Democrat has a good account of the trends, why National Income and Profit Accounts (NIPA) come so late, and how he estimates this series in advance. Scott Grannis has a similar report which also shows the relationship between NIPA profits and stocks. It is dramatically different from the popular valuation charts.

• Michigan consumer sentiment remained strong, increasing to 96.9. Jill Mislinski has the update. It includes an interesting excerpt from the Survey of Consumers chief economist, Richard Curtin. He notes that expectations and partisanship are influencing the outlook. This bears watching. Jill also has this fine chart.

• Q4 GDP revisions edged a little higher than expected to 2.1%
• Pending home sales increased 5.5%. CNBC's Diana Olick has an interesting report, noting that sales would be much higher if there were more inventory. She has an interesting interview from Denver, where construction is 50% behind the pace needed. Builders blame the lack of labor, especially illegal immigrants frightened by recent policy changes. The builder interviewed stated that the jobs were not desirable for most U.S. workers.
  This report, if accurate and typical, has implications for homebuilders, Fed policy (labor market tightness), and immigration policy. You need to watch the video to see the key points.

The Bad

• Personal consumption spending missed expectations. The increase was only 0.1% despite an income increase meeting expectations of 0.4% growth. Steven Hansen (GEI) has a thorough analysis with excellent tables and charts.
• Jobless claims moved slightly lower, to 258K, but the four-week moving average moved higher. I am scoring this as "bad" because the series has moved a bit higher from the best levels. Scott Grannis helps us to keep this in perspective with this interesting chart of claims compared to the labor force.

The Ugly

U.S. Bridges. (No, not the recent North American Bridge Championship, where Bill Gates had a nice win. While that particular event was limited to players with fewer than 10,000 masterpoints, it still included many experts. It was a nice victory, and his best career result). Turning back to actual structures, the American Society of Civil Engineers (ASCE) notes that 40% of bridges are more than fifty years old. Over the next twenty-five years the U.S. is short of needed spending by about $3 trillion.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week, but nominations are always welcome. There are many bogus claims and charts out there! I wrote about headline spinning last week, and the misleading recession forecasts that resulted. We should all encourage astute analysts to help on this front!

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

We have a very big week for economic data, featuring the most important reports.

The "A" List

• Employment report (F). Expectations are in the 180K range, down from last month's 235K.
• ISM index (M). Continuing strength expected.
• Auto sales (M). The concept of "peak auto" has some recent buzz, drawing attention to this private data.
• ISM services (W). Wider scope than manufacturing, but a shorter history. Strength expected.
• FOMC minutes (W). Will be scrutinized for hints about the pace of future rate hikes.
• Initial jobless claims (Th). Is the series edging up from record low levels?

The "B" List

• ADP employment change (W). A good independent read on job growth.
• Construction spending (M). February data, but an important sector.
• Factory orders (T). More February data of significance. Continuing strength expected.
• Trade balance (T). Usually not a market mover, but will get extra attention this week.
• Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

While the schedule is not as heavy as last week, FedSpeak will be featured on several days.

The Thursday meeting between President Trump and China's President Xi Jinping could be extremely important for economic policy and the markets.

Next Week's Theme

This is a big week for economic data. We could usually expect daily analysis of the news, focusing on the Friday employment data. A secondary theme might be the emerging change in Fed policy, with speakers and the release of minutes on Wednesday.