Friday, October 20, 2017

Wall Street banks are starting to sound the alarm on a stock-market correction

Wall Street banks are starting to sound the alarm on a stock-market correction

  • Bank of America Merrill Lynch is the latest Wall Street firm to issue a warning about a stock-market correction.
  • The benchmark S&P 500 hasn't seen a correction, defined as a 10% sell-off, in more than two years.
  • BAML joins Morgan Stanley in the ranks of big firms that have sounded the alarm this week.


The S&P 500 hasn't seen a correction in almost two years. But a growing chorus of Wall Street strategists says one could be right around the corner.
The most recent firm to sound the alarm is Bank of America Merrill Lynch, which forecasts a pullback of at least 10% — the historical definition of a correction — by Valentine's Day.
And while the firm lays out a long list of sell signals, it highlights a couple of elements as the biggest market risks right now. BAML says the "most obvious catalyst" for a correction would be a spike in wage and inflation data that brings back "fear of Fed."
That's a reference to the bearish sentiment that would be likely to accompany a sudden acceleration of the Federal Reserve's rate-tightening schedule, which includes rate hikes and a shrinking of the central bank's massive balance sheet — two measures that would boost fixed-income yields.
"In our view higher bond yields and higher bond market volatility are necessary to engender a major correction in equity and credit markets," Michael Hartnett, BAML's chief investment strategist, wrote in a client note.
Many high-profile investors interviewed by Business Insider highlighted trepidation about the Fed as the top fear. The unwinding that's about to take place is unprecedented, and there's nothing investors fear more than the unknown.
Screen Shot 2017 10 19 at 1.06.01 PMThe 8-1/2-year bull market has mirrored the swelling of the Federal Reserve's balance sheet. That could spell trouble for stocks when the central bank starts unwinding. Bank of America Merrill Lynch
BAML is also wary of a possible bubble in tech stocks, which could be caused by what the firm describes as the two most important investment trends of the past decade: central-bank liquidity and technological disruption. The bank has long expressed worry about overstretched sentiment and trader euphoria — and those two factors may have helped bring about it.
As such, the so-called Icarus trade may soon come to an end. The term, coined by BAML, refers to the "melt up" in stocks and commodities seen since early 2016 — one it sees as unsustainable in the long term.
BAML's correction forecast isn't the first to come out of Wall Street this week. On Tuesday, Morgan Stanley warned of a sharp pullback in equities, albeit a less aggressive forecasted decline of roughly 5% by year end. Its worry stems from what it sees as a fully priced stock market — with minimal upside and a small margin for error — heading into earnings season.
Morgan Stanley also sees — wouldn't you know it — the Fed's balance-sheet unwinding as a major risk, as well as a lack of follow-through on President Donald Trump's tax plan and a potential reversal in a historically low US dollar.
But Morgan Stanley is less pessimistic than BAML about the first quarter of 2018. It forecasts that by the end of March the S&P 500 will hit 2,700, more than 5% above the index's current level.
While the two firms have differing views on the trajectory of stock-market losses, however, both can agree that whatever weakness transpires, it won't threaten the 8-1/2-year bull market. That would require a 20% pullback — a far cry from what either is expecting.
So rest easy, bull-market fans. It's not yet time to panic.
Screen Shot 2017 10 19 at 1.29.00 PMThe stock market hasn't seen a 10% correction in more than two years. Markets Insider

Thursday, October 19, 2017

Trump announced an antitrust attorney to head the FTC

Trump announced an antitrust attorney to head the FTC

Donald TrumpPresident Donald Trump makes a statement about the mass shooting in Las Vegas, Monday, Oct. 2, 2017 at the White House in Washington.AP Photo/Evan Vucci
WASHINGTON (Reuters) - President Donald Trump has selected Joseph Simons, an antitrust attorney from a Washington law firm, to head the Federal Trade Commission, a White House official said on Wednesday.
Trump is expected to nominate Simons to the agency, along with Noah Phillips and Rohit Chopra to be FTC commissioners, the White House official said. Upon confirmation, Simons will be designated chairman, the official said.
The agency is currently headed by Acting Chairman Maureen Ohlhausen, a Republican, with Democrat Terrell McSweeny the only other commissioner. The president has long been expected to name a permanent chair and fill the three empty commission seats, two Republican and one Democrat or independent.
Simons, a partner at the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP, was a director of the FTC's Bureau of Competition from 2001 to 2003.
During Simons' tenure at the FTC, the agency sued to stop Diageo PLC and Pernod Ricard from buying Seagram Spirits and Wine in 2001 to prevent a duopoly in rum. The FTC also filed a lawsuit in 2003 to stop Haagen-Dazs owner Nestle Holdings Inc from buying Dreyer's Grand Ice Cream Inc, which makes also superpremium ice cream. The FTC later settled both cases.
Noah Phillips, who graduated from Stanford Law School in 2005, is chief counsel for U.S. Senator John Cornyn, a Texas Republican. He is also a veteran of the law firms Steptoe & Johnson LLP and Cravath, Swaine & Moore.
To fill the empty Democratic seat on the commission, the president tapped Rohit Chopra, a financial services expert. Chopra, an ally of Massachusetts Senator Elizabeth Warren, is currently at the Consumer Federation of America.
The FTC works with the Justice Department to enforce antitrust law and pursues companies accused of deceptive advertising. It is an independent agency that is headed by a chairman and four commissioners. No more than three commissioners can come from any one party. 
(Reporting by Diane Bartz; editing by Diane Craft)

Wednesday, October 18, 2017

China’s Xi sells his vision of new socialism to the world

College students wave national flags as they watch the opening of the 19th Communist Party Congress in Huaibei in China's eastern Anhui province on October 18, 2017.
STR/AFP/GETTY IMAGES
Xi Jinping, the man shaping a new Chinese era according to his vision of Communist Party greatness, strode onto the massive stage of the Great Hall of the People and bowed twice, once to the thousands of party officials gathered to hear him speak, and again to the elites whose ranks he is about to remake.
Then, for a moment, he directed his words to the rest of the world.
Read also: China's Xi Jinping made the country his own, and he's just getting started
China's way can be your way, too, he said, offering the Chinese system of authoritarian capitalism as an alternative to the Western democracy it is seeking to undermine, in a landmark speech in which he looked back on his first five years in office and sketched a vision for what is to come.
"Socialism with Chinese characteristics is now flying high and proud for all to see," he said.
Xi Jinping trumpets 'new era' of power for China(REUTERS)
The Chinese model has blazed "a new trail for other developing countries to achieve modernization. It offers a new option for other countries and nations who want to speed up their development while preserving their independence; and it offers Chinese wisdom and a Chinese approach to solving the problems facing mankind."
Mr. Xi's comments came early in a speech to open a party congress, held every five years, that will endorse a new generation of party leadership with him at the helm. Claiming success abroad has often been a way for leaders to enhance their standing at home.
But Mr. Xi also offered clear confirmation that his vision extends far beyond his own country's borders as he positions China's illiberal model as a competitor to Western systems of democratic governance and open markets – particularly at a time when the West is seen as fragile and vulnerable, buffeted by demagogic leaders and fractured social structures.
Mr. Xi calls it "socialism with Chinese characteristics for a new era," an ideological banner meant to fly over his vision of renewed authoritarian control at home and "a new type of international relations" abroad, he said.
He cast himself as a promoter of peace, although China's actions have suggested a more divisive attempt to promote its own interests.
"We have seen China seeking to exploit divisions between Europe and the United States, aiming to prevent unified Western positions on matters such as discriminating against foreign companies and growing protectionism in China," one Western diplomat said Wednesday.
Mr. Xi spoke barely 24 hours after Xinhua, the country's central news agency, published a stinging rebuke to world democratic powers in an editorial headlined: "Enlightened Chinese democracy puts the West in the shade."
The echoes of Cold War ideological competition were accompanied by assurances that China will work for global good. But the Chinese President, already a strongman at home, is seeking a legacy that places him in the pantheon of the country's greatest leaders. Burnishing and promoting China's own system would accomplish that.
"The people who initiate new phases often get the most recognition. Mao [Zedong] set up this country; that was a new phase. Deng [Xiaoping] launched the reform and opening up policy; that was another new phase," said Shan Wei, a specialist in China's political development at National University of Singapore, referring to China's two most notable leaders.
Indeed, Mr. Xi's leadership vision has been difficult to distinguish from his own ambitions for power, and his speech did little to quell speculation that he may intend to remain in control for longer than the two terms that has become customary among recent leaders.
"With all his big talk and longer-term plans and visions, it seems like he is maybe laying the ground work to stay on," said Christopher Balding, a professor of economics at Peking University.
Mr. Xi does not appear to have succeeded in gaining a named theoretical contribution, which would enshrine his name in the party's constitution alongside Mao and Deng – an indication that he has not achieved unrestrained internal power. What is clear, though, is that Mr. Xi intends to make China a country that, by building strength at home, takes an increasingly prominent role on the world stage.
"He's put out a blueprint for the Chinese Communist Party and for China for the next 33 years," said Dali Yang, a political scientist at the University of Chicago. "And it's an ambitious set of goals that are designed not only to raise the living standard in China but also China's profile and influence around the globe."
Those goals include becoming, by 2035, a cutting-edge innovator and making the country's soft power "much stronger," while at home improving the environment, setting in place better rule of law and swelling the ranks of the middle class.
By 2050, Mr. Xi wants to ensure "China has become a global leader," he said.
That work is already in progress: sensing weakness in the West, China has already "become much more assertive, pushing its version of globalization – meaning globalization with Chinese characteristics," said Michael Clauss, the German ambassador to China.
Mr. Xi spoke for nearly 3-1/2 hours, colouring his words with soaring rhetoric delivered before the party's assembled elders, including his predecessor Jiang Zemin, who repeatedly glanced at his watch as time slowly passed. At one point, former president Hu Jintao left the room, not returning for nearly 10 minutes. In the cavernous audience gallery, men in uniform dozed and diplomats struggled to keep their eyes open. In Chinese, the printed version of his remarks stretched to 68 pages.
Still, Mr. Xi's comments distilled his vision, including for extensive party control of the country's life. Religions "must be Chinese in orientation"; core socialist values should "become part of people's thinking and behaviour"; works of art should "extol our party"; students should be "well prepared to join the socialist cause"; and the party's influence in the military should strengthen.
"The party exercises overall leadership over all areas of endeavour in every part of the country," he said.
He also promised to abolish shuanggui, the abuse-prone system used by party investigators to interrogate graft suspects without charges. It "will be replaced by detention," Mr. Xi said, as part of reforms to the party.
But he offered no indication that he would ease a clampdown on dissent that has become a hallmark of his tenure.
"We must oppose and resist various erroneous views with a clear stand," he said.
It was an "affirmation of tighter control on freedom of speech, intellectual and media freedom," said Lynette Ong, a scholar of authoritarian politics at University of Toronto.
Indeed, though China may see its experience as a useful model for others, human-rights advocates caution about following its lead.
"By its own admission, China's economic achievements are still fragile, and its environmental and human cost remains deliberately hidden," said Nicholas Bequelin, east Asia regional director for Amnesty International.
"It is too soon to tell whether it constitutes a model or not, and its top-down nature can lead to severe rights violations if it lack strong safeguards."
Mr. Xi gave no corner to critics: "No one should expect China to swallow anything that undermines its interests," he said in a forceful rebuttal that underpins the appeal he hopes China's "new socialism" will hold for others.
"The idea that nations can reject Western universal values in favour of developing their own exceptionalism may be very persuasive to other nations," said Mike Gow, an expert in state propaganda at Xi'an Jiaotong Liverpool University.
"We need to view China's international activity as less about exporting an ideology and more in terms of building regional and global alliances which necessarily undermine and weaken the dominance of Western systems," he said.
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Protectionism, tariffs could slam housing market, CMHC warns

CMHC’s office in Ottawa.
SEAN KILPATRICK/GLOBE AND MAIL
A wave of anti-globalization that leads to widespread protectionism and increased tariffs could cause Canadian house prices to fall by more than 31 per cent in the next five years, according to the results of scenario tests by Canada's national housing agency.
Canada Mortgage and Housing Corp., which insures mortgages against defaults, released the results Wednesday of internal modelling that tests severe economic scenarios. The scenarios – which include a wave of anti-globalization, a severe earthquake, steep oil price declines and a massive housing correction – are all chosen as worst-case events and are not forecast to actually occur, CMHC said.
"We seek out extreme, almost unimaginable situations, and ask ourselves, 'what if,'" said CMHC chief risk officer Romy Bowers. "That is the goal of our stress testing, to measure how we would stand up to these unlikely shocks."
Ms. Bowers said CMHC added the anti-globalization scenario to its testing this year because there has been a wave of protectionist sentiment across the world.
"The scenario we actually modelled is pretty extreme, but that theme was of interest to our board and management as well," she said.
The agency forecast Canadian house prices would fall by 31.5 per cent over the next five years under its anti-globalization scenario as unemployment levels in Canada spiked to 15.3 per cent in five years.
The dramatic scenario assumes a rapid increase in U.S. interest rates and unsustainable debt levels in China would cause large demand shocks globally, spurring greater protectionism, widespread use of tariffs and a euro-zone breakup.
CMHC predicts its core insurance operations could see cumulative claims losses climb to $12.5-billion in total over the next five years under the protectionist scenario, compared with an anticipated base-case scenario of claims losses at $1.7-billion under current conditions.
The scenario would cause CMHC's total profits in its insurance operations to fall to just $118-million over a five-year period from a currently predicted base case of $7.3-billion in profits over five years.
The agency predicted its parallel securitization business – which offers securitized mortgage products to investors – would actually see a small improvement in profits under the anti-globalization scenario, however, because CMHC anticipates the program would be used as a policy tool to provide liquidity to stressed lenders.
However, the agency noted that under all scenarios it studied, it would still remain solvent, and its key capital ratios would remain well above required target levels, indicating it is able to withstand even extreme scenarios.
CMHC's insurance protects lenders in the event of loan defaults by borrowers who have insured mortgages. The stress-testing project helps to reassure banks, investors, home owners and regulators that there will be strong protection for financial institutions even in severe downturns.
The agency's stress tests assume that should any of the studied shocks actually occur, CMHC would halt paying dividends to the federal government to conserve capital.
The most severe impact for CMHC would come if Canada were to suffer a severe housing correction, similar to the correction the U.S. faced in 2008 and 2009, which included a 30-per-cent national decline in house prices and a sharp drop in employment levels.
Under the scenario, CMHC forecasts house prices would fall 30 per cent, unemployment levels would peak at 12 per cent and it would lose $217-million over five years as claims losses hit $11.8-billion. But mandatory capital ratios would still remain strongly positive, the agency concluded.
In 2016, CMHC studied the impact of a sudden spike in interest rates as one of its stress-testing scenarios, assuming a 2.4-percentage-point increase in rates over two quarters would lead to a severe drop in house prices and ultimately the failure of a Canadian financial institution.
The agency did not include the risk in its stress testing this year, however, even though interest rates have recently started climbing and alternative lender Home Capital Group Inc. faced a major crisis in the spring that threatened its viability.
Ms. Bowers said CMHC concluded it did not need to redo the interest rate scenario this year because it had fairly complete information on hand already. CMHC deputy chief risk officer Nadine Leblanc said the anti-globalization scenario also assumed a large increase in mortgage interest rates would occur, so the impact was included in that test.

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