Market Update: June 26, 2017

MarketUpdate_header

Last Week’s Market Activity

  • After closing once again at record levels last Monday, the Dow and the S&P 500 Index battled a wave of sector rotation for the balance of the week, finishing higher by the slightest of margins.
  • It was the 2nd consecutive weekly gain for the S&P 500, as increases in healthcare (+3.7%) and technology (+2.3%) offset weakness in the energy (-2.9%), financials (-1.8%), and utilities (-1.8%) sectors.  Positive news on drug development and potential changes to the Affordable Care Act drove healthcare higher, while continued weakness in WTI crude oil ($43.00; -4.0% for the week) pressured the energy sector.
  • The yield on the 10-year Treasury fell to 2.14%, its second lowest close of 2017, pressuring the U.S. dollar, which edged down -0.2% on Friday.

Overnight & This Morning

  • Asian stocks rose for a third day, led by technology companies.  The MSCI Asia Pacific Index rose +2.0% and equity markets in China and Hong Kong had gains approaching 1.0%. In Japan, The Nikkei managed to climb despite a report from the Bank of International Settlements warning of dollar denominated risk on bank balance sheets.
  • European stocks rebounded from three weeks of losses. German business confidence hit a record in June, but Italy had to bail out two banks totaling $19 billion.
  • Commodities – WTI crude oil rose, trimming its biggest monthly decline in one year. Gold extended its decline to the lowest level in almost six weeks.
  • U.S. stock futures are up slightly as the dollar climbed and Treasury yields jumped after several Federal Reserve officials suggested further rate increases.

MacroView_header

Key Insights

  • Mixed signals. The financial markets are sending mixed signals, trading within a tight range in an extended expansion. The debate now centers on if the U.S. economy can continue to exhibit growth in output and profits (signal from stocks) or it may slip into a recession (signal from Treasuries). Our view is that though the growth rate in manufacturing may have peaked, we expect Purchasing Manager Indexes (PMI) to remain in expansion territory. While auto sales may be down ~5.0% from last year, the rise in household formation suggests pent up demand remains in the housing market. Finally, with solid employment levels and improving wages, consumption is well-positioned to support growth and any clarity on regulation, infrastructure, and tax plans could provide an additional boost.
  • Brexit. Friday marked the 1st anniversary of the controversial Brexit vote, which called for the U.K. to leave the European Union (EU).  To mark the occasion, the pound sterling rose +0.2% to $1.27, paring its weekly decline, and the FTSE 100 Index fell -0.2% on Friday. While the U.K. is the largest importer of the EU countries, the FTSE 100 is largely comprised of exporters, with 2/3rds of its revenue generated overseas.  This helps explain why the approximately 15.0% drop in the pound sterling was accompanied by a rise of a similar magnitude (+17.0%) in the FTSE 100 over the past year.

Macro Notes

  • Technicals continue to look strong. One of the strongest aspects of this equity bull market has been that the technicals have and continue to support higher prices. This week we take a closer look at the global bull market and why broad participation suggests it still has legs.
  • 41 weeks and counting. The S&P 500 has now gone 41 straight weeks without closing lower by 2% or more, but that’s not even the most surprising point.

MonitoringWeek_header

Monday

  • Durable Goods Orders (May)
  • Chicago Fed National Activity Report (May)
  • Cap Goods Shipments and Orders (May)
  • Dallas Fed Mfg. Report (Jun)
  • ECB: Draghi
  • BOE: Carney
  • BOJ: Kuroda

Tuesday

  • Conference Board Consumer Confidence (Jun)
  • Richmond Fed Mfg. Report (Jun)
  • Italy: Mfg. & Consumer Confidence

Wednesday

  • Advance Report on Goods Trade Balance (May)
  • Wholesale Inventories (May)
  • Pending Home Sales (May)
  • France: Consumer Confidence (Jun)
  • Eurozone: Money Supply (May)
  • Itally: PPI & CPI (Jun)
  • Bank of Canada: Poloz
  • Japan: Retail Sales (May)

Thursday

  • GDP (Q1)
  • Germany: CPI (Jun)
  • Eurozone: Consumer Confidence (Jun)
  • BOJ: Harada
  • Japan: National CPI (May)
  • Japan: Industrial Production (May)
  • China: Mfg. & Non-Mfg. PMI (Jun)

Friday

  • Personal Income (May)
  • Consumer Spending (May)
  • Chicago PMI (May)
  • Core Inflation (May)
  • UK: GDP (Q1)
  • France: CPI (Jun)
  • Germany: Unemployment Change (Jun)
  • Eurozone: CPI (Jun)
  • Canada: GDP (Apr)
  • Japan: Vehicle Production (May)
  • Japan: Housing Starts (May)
  • Japan: Construction Orders (May)

 

 

 

 

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC.

Millions Facing a Hefty Increase in Medicare Premiums in 2016

A Medicare patient shakes hands with his doctor after an appointment in Grants Pass, Oregon.
© Jeff Barnard/AP Photo

Under mounting pressure from seniors and labor groups, congressional leaders and the Obama administration are rushing to find a way to avert a huge Medicare premium increase of 50 percent or more for nearly a third of the 50 million elderly Americans who are reliant on Medicare for their physician care and other health services.

House Speaker John Boehner (R-OH), House Minority Leader Nancy Pelosi (D-CA) and White House officials have been scrambling behind the scenes to spare millions of seniors the expense of huge Medicare Part B premium hikes. While the problem pales in comparison to the larger budget issues, including highway spending and debt ceiling challenges, lawmakers are super sensitive to the concerns of seniors heading into the crucial 2016 election year.

“Congress has a responsibility to act,” Pelosi said in a statement this week. “If we do nothing, millions of American seniors will suffer. Democrats continue to press the Republican leadership to bring a fix to the floor so we can prevent the serious harm this increase will have on states and low-income seniors across the country.”

Some 70 national organizations, including AARP, labor groups and health insurance company trade associations, sent a letter to Republican and Democratic congressional leaders last week urging prompt action to block or mitigate the looming premium increases. “Older adults and people with disabilities cannot shoulder these unprecedented increases,” Joe Baker, president of the Medicare Rights Center, told  The New York Times  .

The pending sharp premium increase, reported in August by The Fiscal Times , was prompted by a strange twist in the law that effectively penalizes wealthier beneficiaries and others any time the Social Security Administration fails to approve an annual cost of living adjustment. This will be only the third time since 1975 that Social Security will not increase the cost of living benefit, simply because the Consumer Price Index used by the government has remained relatively flat.

Medicare Part B and the Social Security trust fund are intertwined, and most seniors on Medicare have their monthly premiums deducted from their Social Security checks. Because the federal law for various reasons “holds harmless” about 70 percent of Medicare recipients from premium increases to cover unexpected rising healthcare costs, the remaining 30 percent of Medicare Part B beneficiaries suffer the consequences by being made to pay higher premiums.

Medicare officials are expected to announce a final decision on 2016 premiums later this month after reviewing federal Bureau of Labor Statistics data on consumer prices. However, many are assuming the premiums will go up.

Short of congressional or Department of Health and Human Services intervention at this point, roughly 15 million seniors, first-time beneficiaries or those currently claiming both Medicare and Medicaid coverage will see their premiums jump from $104.90 per month to $159.30 for individuals, according to  an analysis  by the Center for Retirement Research at Boston College. Higher-income couples would pay multiples of that increase.

The cost to Congress of averting such a premium hike is substantial – ranging from $2.8 billion to $7.5 billion, depending on calculations and budgetary baselines used in the computations. An aide to Boehner said on Tuesday that the speaker – who retires from Congress at the end of the month and is trying to complete a lot of budget business – is insisting that the cost of the bailout be offset by cuts in other programs.

Pelosi had urged Boehner to include the funding in the short-term continuing resolution approved late last month that will keep the government operating through December 11, according to a source. Now she is pressing him for a stand-alone bill to pass this week before the premium increase is likely to take effect. According to an aide, the longer Congress takes to act, the more expensive it becomes.

Pelosi has scheduled a press conference with other Democratic leaders on Wednesday to call on Boehner and House Republicans “to take urgent action to keep Medicare Part B premiums and deductibles affordable for millions of America’s seniors.”

Written by Eric Pianin of The Fiscal Times

(Source: The Fiscal Times)

Bernanke: Wall St Execs Should Have Gone to Jail for Crisis

© Manuel Balce Ceneta/AP Photo
© Manuel Balce Ceneta/AP Photo

WASHINGTON — Former Federal Reserve Chairman Ben Bernanke says some Wall Street executives should have gone to jail for their roles in the financial crisis that gripped the country in 2008 and triggered the Great Recession.

Billions of dollars in fines have been levied against major banks and brokerage firms in the wake of the economic meltdown that was in large part triggered by reckless lending and shady securities dealings that blew up a housing bubble.

But in an interview with USA Today published Sunday, Bernanke said he thinks that in addition to the corporations, individuals should have been held more accountable.

“It would have been my preference to have more investigations of individual actions because obviously everything that went wrong or was illegal was done by some individual, not by an abstract firm,” Bernanke said.

Asked if someone should have gone to jail, the former Fed chairman replied, “Yeah, I think so.” He did not, however, name any individual he thought should have been prosecuted and noted that the Federal Reserve is not a law-enforcement agency.

Bernanke is promoting his new 600-page memoir, “The Courage to Act: A Memoir of a Crisis and Its Aftermath,” which is scheduled to be published Monday.

He began the book after leaving the Fed in 2014. The memoir details his take on the crisis in which the government took over mortgage giants Fannie Mae and Freddie Mac and provided hundreds of billions in aid to the biggest U.S. financial institutions.

The Associated Press obtained an early copy of the book last week. He writes that the taxpayer-provided bailouts of banks and Wall Street firms were hugely unpopular, but says they were necessary to avoid an economic catastrophe.

“I certainly was not eager to bail out Wall Street and I had no reason to want to bailout Wall Street itself,” he told USA Today. “But we did it because we knew that if the financial system collapsed, the economy would immediately follow.”

Written by Associated Press

(Source: MSN)

Weekly Market Commentary: October 5, 2015

Provided by geralt/Pixabay
Provided by geralt/Pixabay

Well, third quarter was a humdinger.

It began with the first International Monetary Fund (IMF) default by a developed country (Greece) and finished with Hurricane Joaquin possibly headed toward the east coast. In between, China’s stock market tumbled, the Federal Reserve tried to interpret conflicting signals, and trade growth slowed globally.

After such a stressful quarter, we may see an uptick in the quantity of alcoholic beverages consumed per person around the world. That number had declined (along with economic growth in China) between 2012 and 2014, according to The Economist.

No Grexit – for now

Despite defaulting on its IMF loan, rejecting a multi-billion-euro bailout plan, and closing its banks for more than two weeks, Greece was not forced out of the Eurozone. Instead, Europe cooked up a deal that left the IMF unhappy and analysts shaking their heads.

The Economist reported the new deal for Greece was an exercise in wishful thinking. The problem is the deal relies on “the same old recipe of austerity and implausible assumptions. The IMF is supposed to be financing part of the bailout. Even it thinks the deal makes no sense.” It’s a recipe we’re familiar with in the United States: When in doubt, defer the problem to the future.

A downturn in China

Despite reports from the Chinese government that it hit its economic growth target (7 percent) on the nose during the first two quarters of the year, The Economist was skeptical about the veracity of those claims. During the first quarter:

“Growth in industrial production was the weakest since the depths of the financial crisis; the property market, a pillar of the economy, crumbled. China reported real growth (i.e., after accounting for inflation) of 7 percent year-on-year in the first quarter, but nominal growth of just 5.8 percent.”

That statistical sleight of hand implies China experienced deflation early in the year. It did not.

On a related note, from mid-June through the end of the third quarter, the Shenzhen Stock Exchange Composite Index fell from 3,140 to about 1,716, according to BloombergBusiness. That’s about a 45 percent decline in value.

Red light, green light at the Federal Reserve

Green light: employment numbers. Red light: consumer prices, inflation expectations, wages, and global growth. Late in the quarter, the Federal Reserve decided not to begin tightening monetary policy. According to Reuters, voting members of the Federal Open Market Committee (FOMC) decided uncertainty in global markets had the potential to negatively affect domestic economic strength.

They may have been right. The Wall Street Journal reported, although unemployment remained at 5.1 percent, just 142,000 jobs were added in September. That was significantly below economists’ expectations that 200,000 jobs would be created. The Journal suggested the labor market has downshifted after 18 months of solid jobs creation.

Global trade in the doldrums

The global economy isn’t as robust as many expected it to be. According to the Business Standard, the World Trade Organization (WTO) lowered its forecast for global trade growth during 2015 from 3.3 percent to 2.8 percent. Falling demand for imports in developing nations and low commodity prices are translating into less global trade. Expectations are trade growth will be 3.9 percent in 2016, which could help support global economic growth.

Data as of 10/2/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 1.0% -5.2% 0.3% 10.5% 11.4% 4.8%
Dow Jones Global ex-U.S. 0.7 -8.6 -10.3 0.8 0.0 0.9
10-year Treasury Note (Yield Only) 2.0 NA 2.4 1.6 2.5 4.4
Gold (per ounce) -0.5 -4.9 -5.9 -13.7 -2.8 9.4
Bloomberg Commodity Index -0.7 -15.8 -25.7 -16.1 -8.7 -6.9
DJ Equity All REIT Total Return Index 1.5 -3.3 9.2 9.4 11.6 6.8

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Dow Closes Down More Than 200 Points on Surprise Yuan Devaluation

Provided by CNBC
Provided by CNBC

Stocks closed lower by about 1 percent on Tuesday after an unexpected move overnight by the People’s Bank of China to depreciate the yuan by nearly 2 percent.

“The major concern is, the prospect of a China hard landing is more ominous as far as its impact on global growth,” said Eric Wiegand, senior portfolio manager at U.S. Bank’s Private Client Reserve.

The Dow Jones industrial average ended 212 points lower, wiping out most of Monday’s gains. Apple briefly plunged more than 5 percent and Caterpillar fell more than 2.5 percent to lead declines. The index’s 50-day moving average fell below its 200-day moving average, a bearish condition many analysts term a “death cross.”

On Monday, the blue-chip index snapped its first seven-day losing streak in four years with a 241-point rise.

Biotech stocks and Apple outweighed Google’s 4 percent jump to pressure the Nasdaq Composite off 1.2 percent.

Sharp declines in oil pressured the energy sector to give back much of Monday’s gains, dropping nearly 2 percent as one of the greatest decliners in the S&P 500.

Renewed concerns about a deeper slowdown in the world’s second-largest economy increased negative sentiment.

It’s the “interpretation that the U.S. dollar is going to further strengthen against the Chinese yuan and be a further headwind against U.S. multinationals,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

“I’m a little surprised (China) did this because they had plenty of room to cut interest rates,” Luschini said.

The drop in the daily peg to 6.2298 renminbi against the U.S. dollar, down from 6.1162 on Monday, was the largest one-day move in more than two decades and took the currency back to levels from three years ago. The central bank described the decision as a “one-off depreciation.”

“I think the market’s perception is if China is doing that they’re really worried about their economy,” said Jason Leinwand, managing director at Riverside Risk Advisors. “Any currencies that have direct ties with China will be weakened.”

The U.S. dollar index traded mildly higher, while the euro held above $1.10 on a bailout deal between Greece and its creditors. The yen was weaker against the dollar, near 125 yen.

European stocks closed sharply lower, with the German DAX off more than 2.5 percent, on the yuan move. Asian stocks ended mostly lower, with the Shanghai Composite flat.

“This news is negative for exporters (such as automakers) and luxury goods makers as well as other companies that derive foreign exchange revenue from China and other parts of Asia,” said Ilya Feygin, senior strategist at WallachBeth Capital.

He noted that the currency instability benefits Treasurys and gold.

Treasury yields fell as traders piled into dollar-denominated assets, with the 10-year yield briefly hitting its lowest level since June 1 before trading near 2.14 percent and the 2-year yield at 0.67 percent.

The Treasury Department auctioned $24 billion of 3-year notes at a high yield of 1.013 percent at 1:00 p.m. ET.

Gold rallied on Monday to its highest level since the end of June. Gold futures traded near $1,110 an ounce in afternoon trade.

Investors also watched Google, which unexpectedly announced after the close Monday that it will become part of a new publicly traded entity called Alphabet. Shares will still trade under the tickers GOOGL and GOOG. Class A shares jumped more than 3.5 percent in the afternoon.

Oil extended a recent decline. Brent crude was down more than 2.5 percent to below $49 a barrel, while U.S. crude briefly fell below $43 a barrel for the first time since March.

On Monday, dollar weakness and a refinery outage helped crude rally nearly 2.5 percent from a near five-month low earlier in the session

Crude oil futures hit a five-month intraday low of $42.69 and settled down $1.88, or 4.18 percent, at $43.08 a barrel, a six-year low. Gold futures ended up $3.60 at $1,107.70 an ounce.

On the data front, preliminary second quarter productivity was up at an annual rate of 1.3 percent, while unit labor costs were up 0.5 percent.

Wholesale sales rose 0.1 percent in June, the weakest since March of this year, while inventories topped expectations with a gain of 0.9 percent. May’s figure was revised lower to 0.6 percent from 0.8 percent.

“I think once investors get past the yuan devaluation we can focus on the (U.S.) economic picture, which remains good,” Luschini said.

Most analysts expect the Federal Reserve will find enough support from economic data to raise rates as early as September.

“The overnight devaluation of the Chinese yuan will likely be seen by Fed officials as a minor headwind to growth, but is not significant enough to change our base view of September liftoff,” J.P. Morgan said in a note. “The yuan has a 21.3 percent weight in the Fed’s broad dollar index, and so simply taking the 0.4 percent dollar change implied by the PBoC action at face value would imply perhaps a few hundredths off growth over the next one to two years (using a rough rule of thumb that 10% in the broad dollar subtracts about 1% off the level of GDP over time).”

Before the opening bell, Towers Watson posted quarterly results that beat expectations on both the top and bottom line.

In other earnings news, Shake Shack posted results after the close Monday that beat on both the top and bottom line. The restaurant chain also raised its full-year guidance.

Kraft Heinz reported a decline in sales at both its Kraft and Heinz divisions. Combined results for the recently merged firm were not reported.

Computer Sciences, Symantec, Cree and Cyber Ark Software will report after the bell.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded above 14.

About seven stocks declined for every three advancers on the New York Stock Exchange, with an exchange volume of 505 million and a composite volume of nearly 2.5 billion in afternoon trade.

Written by Evelyn Cheng of CNBC

(Source: CNBC)

Investors Scramble to Avoid Puerto Rico Losses

© Provided by CNBC
© Provided by CNBC

Once seen as a golden opportunity, big-money investors are now scrambling to keep their bets on Puerto Rico whole.

Hedge funds, mutual funds and other investors piled in over the last two years, thinking others had overreacted to the island’s fiscal problems by dumping local bonds.

But the value of their debt holdings fell sharply early this week on a string of bad news.

The U.S. territory’s governor surprised observers by saying its $72 billion in debts weren’t payable. The White House explained that it was not contemplating a bailout. Ratings agencies cut their assessments of Puerto Rican bonds. And a report by a group of former International Monetary Fund officials detailed just how bad the island’s fiscal problems are.

“The coming weeks will bring showdowns between … the governor and bondholders, and out of the rubble, we expect the PR government to emerge leaner, having shed some debt and restructured some operations,” Height Securities said in a report Monday.

In other words, more observers think that hedge funds and other creditors should expect to accept less than face value for the bonds they own. Some Puerto Rico bonds were trading at 68 cents on the dollar Tuesday.

The bad news doesn’t mean investors are giving up.

Two bands of mostly hedge fund bondholders continue to put pressure on local officials. They still hope to come up with a deal that gives Puerto Rico the money it needs to fund its operating budgets and, at the same time, provide a profit for investors. The negotiations are now more urgent giving looming deadlines: a total of $1.9 billion in various bond payments, including general obligation debt, are due on July 1, according to a market participant.

The largest band of investors owns different types of government-backed bonds.

A year old, the so-called Ad Hoc Group is made up of 35 members and represents $4.5 billion in Puerto Rican debt holdings such as GO bonds, seen as having the best chance of a full payment. Not all the investors in the group are disclosed, but its steering committee—those that actively negotiate with the government—are Fir Tree Partners, Centerbridge Partners, Davidson Kempner Capital Management, Stone Lion Capital Partners, Brigade Capital Management and Monarch Alternative Capital.

There was no comment Monday or Tuesday, but the group wrote in a letter on June 24 that it wanted to meet with government officials and “be part of the solution to the Commonwealth’s fiscal challenges.” The Government Development Bank for Puerto Rico, which represents the other side, declined to comment.

The other investor alliance is holders of bonds from the Puerto Rico Electric Power Authority, or PREPA. Also called an ad hoc group, it includes hedge funds Knighthead Capital Management, Marathon Asset Management, Goldman Sachs Asset Management, D.E. Shaw Group, BlueMountain Capital Management, Angelo, Gordon & Co. and large mutual fund investors Franklin Templeton and OppenheimerFunds.

Together the group holds about 40 percent of the utility’s bonds, or around $3 billion worth. Insurers such as MBIA  (MBI) and Assured Guaranty  (AGO) also have significant exposure to PREPA bonds and their stocks were hammered this week as a result.

The group negotiated with PREPA officials Monday, according to a person familiar with the situation, but no solution had been reached. PREPA owes about $400 million in a bond payment Wednesday, and a short-term deal could push the negotiating deadline forward in the hopes of a more comprehensive restructuring. Past extensions have been for 30 days.

A spokesman for PREPA bondholders declined to comment, and a representative for PREPA did not respond to a request.

Written by Lawrence Delevingne of CNBC

(Source: CNBC)

World Markets Suddenly Facing a Summer of Trouble and Strife

© Provided by CNBC
© Provided by CNBC

It’s approaching that time of year when market activity typically slows, as traders and central bankers alike depart for long holidays.

But this summer is shaping up to be anything but quiet for markets, with Greece at a cross roads, stocks in China nose diving and rising uncertainty about the timing of a U.S. interest rate rise.

“Summers are always difficult in the markets, but every summer turns out to be interesting and there’s so much going on this summer,” Bill Blain, a strategist at Mint Partners in London, told CNBC on Friday.

While the crisis in Greece, which holds a referendum this Sunday on whether or not to accept creditor-proposed bailout terms, is likely to be the trigger for near-term volatility, markets have much bigger fish to fry in the weeks to ahead.

Take for instance the slide in Chinese stock markets, which is fuelling concerns about the outlook for the world’s second biggest economy.

The benchmark Shanghai Composite index, which had risen as much as 113 percent between November and a peak in June, has collapsed, sliding almost 30 percent.

“It’s not Greece but China we should be concerned about,” said Blain. “The correction that we’re seeing in stocks is fascinating and the fact that the authorities are clearly nervous should make markets nervous,” he said, referring to measures taken this week by Beijing to shore up the battered equity market.

Fed up with Fed?

Analysts said uncertainty about the timing of a rise in U.S. interest rates was another key reason to keep traders on edge over the summer months, with Thursday’s softer-than-expected June jobs data prompting a re-think on the rate outlook.

“I think the biggest risk is not so much Greece; not so much China (stocks), which is in a dramatic move but is pretty localised, I think it is the Fed and the U.S. economy,” Giles Keating, the global head of research for private banking and wealth management at Credit Suisse, told CNBC’s “Squawk Box Europe” on Friday.

The timing of the Fed’s first rate hike since 2006 and the pace of subsequent monetary tightening is viewed as one of the biggest risks to global markets – from emerging markets, which are seen among the most vulnerable to a rise in risk aversion, to bond markets, which have already seen heavy selling.

Slim Feriani, CEO of MENA Capital, said that while Greece was a concern, Fed policy was a bigger worry for markets.

“The bigger cloud hanging over markets in general in the next 6-12 months is the Fed and what they do and when,” he said from a fund forum in Monaco earlier this week.

Blain at Mint Partners said there was no reason for the Fed to hike rates soon, as there was no pressure on the economy yet. He suggested that “perhaps a lot of the stock market upside has been overdone.”

The tech-heavy Nasdaq  (.IXIC) hit a record high in June, while the broader S&P 500  (.SPX) closed at about 2,077 points on Thursday – about 2.5 percent off a record high hit in May.

Uncertainty surrounding Greece meanwhile is unlikely to go away, with Sunday’s shock referendum suggesting the country will remain a source of market volatility in the weeks ahead, analysts said.

Greece this week became the first advanced economy to default on a loan from the International Monetary Fund and its worsening financial crisis has fuelled fears that it will become the first country to leave the euro zone.

If Greek voters back the creditors’ bailout plan—which the anti-austerity government has recommended they reject—Greek Prime Minister Alexis Tsipras has made it clear he will quit.

“There is a view that we’re going to get this referendum result on Monday morning and that will explain everything,” Blain said.

“All the referendum will do is start the next phase of negotiations and the crisis continues. If we get a ‘yes’ vote, we could be dealing with a new government as it looks inevitable the government could fall — so there lots of things for markets to worry about.”

Written by Dhara Ranasinghe of CNBC

(Source: CNBC)

Stocks Close Up More than 1% Amid Greece Relief

© Katrina Tuliao, Flickr, Creative Commons
© Katrina Tuliao, Flickr, Creative Commons

U.S. stocks closed more than 1 percent higher in light volume trade Monday, following gains overseas on news of a bailout agreement between Greece and its creditors.

“I think it’s just a sigh of relief that it’s over, but let’s face it, they just kicked the can,” said Maris Ogg, president of Tower Bridge Advisors. “It seems like we kicked the can on a number of fronts. Earnings probably will be front and center int he next couple of weeks.”

About 11 stocks advanced for every 4 decliners on the New York Stock Exchange, with an exchange volume of 571 million and a composite volume of 2.8 billion as of 3:59 p.m. Average volume for the entire day is 3.4 billion.

“You’ve got a relief going on, short covering going on,” said Quincy Krosby, market strategist at Prudential Financial. “What you want for confidence buying is to see a market close with buying orders on the close.”

The Dow Jones industrial average traded about 220 points higher, with Microsoft and DuPont leading most blue chips higher. The index recovered recent losses to trade about 0.80 percent higher for the year.

The Nasdaq Composite jumped 1.5 percent as Apple and the iShares Nasdaq Biotechnology ETF (IBB) rose more than 1.5 percent.

The S&P 500 held near 2,100, led by a rise in information technology stocks and consumer discretionary’s 1.3 percent gain to an all-time high.

The Dow transports also briefly advanced more than 1 percent, with airlines leading gains.

“I think the market’s technically very oversold,” said Bruce Bittles, chief investment strategist at RW Baird. “The market’s poised to go up but to break this trading range (we’ve been in) since January you need to see volume pick up… number of stocks hitting 52-week highs expand.”

He said the S&P 500 breaking past 2,100 would be an encouraging sign.

European Council President Donald Tusk said early on Monday that euro zone leaders reached an unanimous agreement with Greece after all-night talks in Brussels to move forward with a bailout loan for the cash-strapped nation, provided Athens implement tough reforms.

“The jury’s still out on whether or not this is going to be accomplished,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

To receive this third bailout, Greece’s parliament must pass the new rules in areas such as privatization, labor laws and pension reforms by Wednesday. The 86 billion euro ($95.2 billion) in funds would come over three years.

In the meantime, euro zone finance ministers were expected to discuss Monday how to keep Greece financed before the bailout deal is reached. Athens faces a 7 billion euro repayment deadline on July 20 to the European Central Bank.

The ECB announced it maintains the emergency assistance cap for Greek banks, which will remain closed for at least two more days.

The Dow Jones industrial average futures were about 140 points higher before the open.

European stocks jumped on news of the conditional Greece deal, with the German DAX up about 1.5 percent and the STOXX Europe 600 up nearly 2 percent

In Asia, stocks surged with the Nikkei up 1.57 percent and the Shanghai Composite leaping 2.4 percent as it extended a recovery from a recent plunge.

Art Hogan, chief market strategist at Wunderlich Securities, said the domestic response will likely be less exuberant since the major averages ended last week little changed. Only the Dow eked out a gain, of a mere 0.17 percent.

Stocks rose slightly past their opening levels, while bond yields held steady. The U.S. 10-year note yield was 2.44percent and the 2-year held near 0.67 percent. The German 10-year bund yield fell to 0.85 percent.

The U.S. dollar extended gains with the euro dipping below $1.10.

Also in focus is the Iranian nuclear deal, which would allow more oil exports. Talks on a deal were extended past a June 30 deadline and are expected to reach a conclusion Monday.

Crude oil futures settled down 54 cents, or 1.02 percent, at $52.20 a barrel on the New York Mercantile Exchange. Gold futures fell $1.70 to $1,156.20 an ounce in afternoon trade.

No economic data or earnings of note were expected Monday.

Second-quarter earnings season gets underway with a slew of major reports on Tuesday that include JPMorgan Chase and Wells Fargo. On the economic front, retail sales are due Tuesday morning.

“Each data point in and of itself may not be important, but collectively they’re important, especially since there’s a premium on the data,” Krosby said.

Federal Reserve Chair Janet Yellen delivers her semi-annual testimony on the economy to Congress on Wednesday and Thursday.

“If she focuses on (international news and the dollar) that will give the market a huge boost because she’s more concerned about it than she suggested in her speech Friday,” Krosby said.

In other news, the United States posted a budget surplus of $51.8 billion in June, down 27 percent from the same period last year, the U.S. Treasury Department said on Monday.

The Dow Jones Industrial Average traded up 211, or 1.19 percent, at 17,972, with Microsoft and Caterpillar leading gains and Merck and UnitedHealth the only decliners.

The S&P 500 traded up 21 points, or 1.05 percent, at 2,098, with information technology leading nine sectors higher and utilities the only decliner.

The Nasdaq traded up 72 points, or 1.45 percent, at 5,070.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.

Written by Evelyn Cheng of CNBC

(Source: MSN)

Eurozone Reaches Deal on Greece

© European Pressphoto Agency
© European Pressphoto Agency

BRUSSELS—Eurozone leaders said Monday morning that they would give Greece up to €86 billion ($96 billion) in fresh bailout loans as long as the government of Prime Minister Alexis Tsipras manages to implement a round of punishing austerity measures in the coming days.

The rescue deal—hammered out after 22 hours of, at times acrimonious, negotiations between the currency union’s leaders and finance ministers—requires the Greek left-wing government’s near-total surrender to its creditors’ demands.

But it gives the country at least a fighting chance to hold on to the euro as its currency.

“The deal is hard,” Mr. Tsipras said after the summit, warning that the measures required by creditors will send the country’s economy further into recession.

European stocks rallied early Monday on the news. By mid-morning, the Stoxx Europe 600 was up 1.5%, building on Friday’s hefty gains. Germany’s DAX rose 1.4%, France’s CAC-40 added 1.9% and London’s FTSE 100 rose 0.6%. In southern Europe, Italy’s FTSE MIB climbed 1.2% and Spain’s IBEX gained 1.5%.

By Wednesday, Athens’s Parliament has to pass pension overhauls and sales tax increases that voters overwhelmingly rejected in a referendum just one week ago. Greece now has to implement European Union rules that make it easier to wind down broken banks, including by sharing the cost with investors and creditors.

“Trust needs to be restored,” German Chancellor Angela Merkel said at a news conference.

“The agreement was laborious. It took time but it was done,” said Jean-Claude Juncker, the president of the European Commission.

“There won’t be a Grexit,” Mr. Juncker added, referring to a Greek exit from the eurozone.

In a concession to Greece, eurozone governments will consider measures to make the country’s debt more manageable, for instance by giving it more time to repay rescue loans.

A detailed rescue program that will have to be negotiated after the first overhauls and cuts have been implemented will contain measures that go far beyond the kind of oversight and external control other governments under eurozone bailouts have endured.

The most divisive step demanded by Greece’s creditors is the creation of a fund that would hold some €50 billion in state-owned assets slated to be privatized or wound down in the coming years. The fund will be under European supervision, Ms. Merkel said.

Most of the money raised will go to pay off Greece’s debt and help recapitalize its broken banks, while €12.5 billion can be used for investment, said Ms. Merkel.

“The advantages outweigh the disadvantages,” she said about the deal, while warning that Greece’s path back to growth will be long and arduous.

Despite these big concessions by Mr. Tsipras, Greece’s future in Europe’s currency union still hangs in the balance.

Passing the tough new bailout measures through Greece’s Parliament could split Syriza and its right-wing coalition partner, the Independent Greeks, which in turn could trigger fresh elections. And there wasn’t an answer on when the country’s banks—closed for most business for the past two weeks—will reopen or how Greece will make a €4.2 billion payment to the European Central Bank on July 20.

The eurozone’s finance ministers will discuss how to come up with a mechanism to meet Greece’s short-term financial needs “as a matter of urgency,” Donald Tusk, the president of the European Council who led the talks, said after the summit.

A statement issued after the summit says Greece will need between €82 billion and €86 billion in fresh funding over the next three years. Between €10 billion and €25 billion will be required to recapitalize Greek banks, damaged by months of deposit outflows and two weeks of capital controls.

French President François Hollande, whose government lobbied hard for Greece in recent weeks, said he expects the ECB to step in with additional liquidity for Greek lenders, as long as Athens follows through on a deal. That could allow banks to gradually reopen.

“That was the indispensable condition, but it will take a few days,” Mr. Hollande said.

In a concession to Greece, eurozone governments will discuss ways to make the country’s debt load more manageable later this year.

“There will be a reprofiling of the debt by extending maturities and doubtless a negotiation on the interest rates,” said Mr. Hollande. “That is part of the agreement.” Ms. Merkel stressed that there won’t be a cut to the nominal value of rescue loans.

European officials said negotiations came close to collapse at some points during the night, when Mr. Tsipras argued that some of the creditors’ demands would be impossible to meet. Germany in particular has been driving a hard line, which for much of the evening included the possibility of a “time-out” for Greece from the currency union.

“In Germany there was strong opinion for Grexit,” Mr. Hollande said, “and not just in Germany.”

“I refused this solution,” he added.

As part of the deal, Greece’s administration will be modernized and depoliticized, Ms. Merkel said, adding that the Athens government will be expected to make first proposals by July 20.

The measures laid out in Monday’s statement reach deep into the workings of Greece’s economy. They include changes to labor laws that would make it easier to fire workers, as well as the further liberalization of markets for products such as pharmaceuticals, milk and baked goods, the statement said. Greece also would have to privatize state assets, including the electricity network operator.

Contrary to Greece’s wishes, the International Monetary Fund will remain involved in bailing it out even after the fund’s existing rescue program expires in March. Athens defaulted on a €1.56 payment to the IMF on June 30 and is unlikely to make a €456 million payment due Monday. The summit statement said it was important for the government to cover the failed payments.

“It has been a laborious night, but I think it is a good step to rebuild confidence,” said IMF Managing Director Christine Lagarde.

Written by Gabriele Steinhauser, Viktoria Dendrinou, Matthew Dalton of The Wall Street Journal

(Source: MSN)

Exclusive: Greek Banks Face Closures, Bailout or Not – Sources

© REUTERS/Cathal McNaughton
© REUTERS/Cathal McNaughton

Some large Greek banks may have to be shut and taken over by stronger rivals as part of a restructuring of the sector that would follow any bailout of the country, European officials have told Reuters.

European leaders will gather on Sunday in a last-ditch attempt to salvage agreement with Greece after months of acrimonious negotiations that have taken the country to the brink of leaving the euro.

But regardless of whether or not fresh funds are now unlocked for the government, some Greek banks, damaged by political and economic havoc, may have to be closed and merged with stronger rivals, officials, who asked not to be named, told Reuters.

One official said that Greece’s four big banks – National Bank of Greece (NBGr.AT), Eurobank (EURBr.AT), Piraeus (BOPr.AT) and Alpha Bank (ACBr.AT) – could be reduced to just two, a measure that would doubtless encounter fierce resistance in Athens.

A second person said that although mergers of banks were necessary, this could happen over the longer term.

“The Greek economy is in ruins. That means the banks need a restart,” said the first person, adding that prompt action was necessary following any bailout between Athens and the euro zone. “Cyprus could be a role model.”

“You have a tiny bit of time … you would do restructuring straight away.”

Greece’s financial system has been at the heart of the current crisis, hemorrhaging deposits as relations between the radical left-wing government of Prime Minister Alexis Tsipras and creditors worsened.

After Athens defaulted on debt owed to the International Monetary Fund last month, the ECB froze emergency funding for the banks, precipitating their temporary closure and a 60-euro daily limit on withdrawals from cash machines.

A decision by Greek voters last week to reject bailout terms offered by the country’s international creditors prompted the ECB to maintain its cap, meaning that the banks will run out of cash soon.

LIQUIDITY AND SOLVENCY

A year ago, Greece’s bankers thought they were on the cusp of a new era. They had restructured as part of the country’s bailout deal, had raised fresh equity from international investors and had regained access to debt markets to fund lending.

But the economic and political turmoil that has ensued since Tsipras came to power in January means that they are dangerously short of cash.

Even after the immediate liquidity problems are worked out, any restructuring of the sector would first require a prompt recapitalization of Greece’s strongest lenders because rising bad debts and exposure to Greek government bonds mean they are in danger of becoming insolvent.

A timeline and exact plan for the sector’s revamp could be finalised after a recapitalization.

Such action would face stiff political resistance in Athens, where Tsipras has pledged to ‘restore our banking system’s functioning’. Bank mergers save money but cost jobs, making them unpopular.

Reflecting such obstacles, a second person said: “There would be an interest in having less banks … but I’m wondering whether this would make sense in the short term.”

Any closures, which would be managed primarily by Greek authorities under the watch of the European Central Bank’s supervisors, would not typically affect customers as their deposits and accounts would migrate to the bank’s new owner.

Greece’s finance ministry was not immediately available for comment, while a spokeswoman for the ECB said: “The ECB Banking Supervision is closely monitoring the situation of Greek banks and is in constant contact with the Bank of Greece.”

CYPRUS MODEL

Any such revamp would be a stark reminder of the withered state of the country’s financial system, where deposits had shriveled to their lowest level in more than a decade before savers were forced to ration cash withdrawals.

Of Greece’s four big banks, National Bank of Greece, Eurobank and Piraeus fell short in an ECB health check last year, when their restructuring plans were not taken into account.

Only Alpha Bank was given an entirely clean bill of health.

A restructuring could follow a similar pattern to Cyprus, where one of the island’s two main banks was closed as part of its stringent bailout, and Ireland, where three lenders were either shut or merged with rivals.

But a senior Greek banker, while acknowledging that the ECB could embark on fresh stress tests and “set the recapitalization, restructuring process going again”, said any mergers would reduce competition.

“If the argument is cost efficiency and whether Greece is overbanked, with four players there is a semblance of competition,” he said. “With fewer players, competition will be reduced even more.”

Written by John O’Donnell of Reuters

(Source: MSN)