Tuesday, July 12, 2016

STOCKS CLOSE AT ALL-TIME HIGHS: Here's what you need to know

STOCKS CLOSE AT ALL-TIME HIGHS: Here's what you need to know

puffin birdPuffins carry sand eels for their young as they fly above the Farne Islands off the Northumberland coast, northern England, July 8, 2013.REUTERS/Nigel Roddis
Stocks hit all-time highs for the first time since May 2015 during an otherwise quiet day on the US economic front.
First, let's head to the scoreboard:
  • Dow: 18,226.93, +80.2 (+0.4%)
  • S&P 500: 2,137.16, +7.3, (+0.3%)
  • Nasdaq: 4,988.64, +31.9, (+0.6%)
  • WTI crude oil: $44.49, -2.0%
  • 10-year Treasury yield: 1.432%
1. Stocks are at all-time highs. The benchmark S&P 500 index crossed the previous intraday record of 2,134.72, which it touched on May 20, 2015. Tech, industrials, and materials led gains.  "With the economy averaging a little over 2% growth per year on average since the recession ended in 2009 a combination of modest growth, low interest rates and improvements in jobs, housing and autos could help keep the stock market grinding higher," John Stoltzfus, Oppenheimer chief investment strategist, wrote in a note on Monday.
2. But this stock market rally might not be like the others.  Dominic Konstam and his team argued in a note on Friday that the current rally is about the declining equity risk premium, which is simply the excess return the stock market provides over a risk-free rate like bond returns.
3. Dutch 10-year government bond yields dropped below zero for the first time evermaking them the latest to join the negative yield club. Amazingly, there's nearly half a millennium of records to compare that against, as record keeping began in 1517. As a historical reference point, that's the same year that Marin Luther published his 95 Theses. On a larger scale, there's roughly $13 trillion of global negative-yielding debt now. By comparison, there was about $11 trillion ahead of the UK's vote on EU referendum.
4. Starbucks is giving every US employee a raise of at least 5%. Business Insider's Myles Udland noted that Starbucks' preemptive wage increase reflects the clear competition for labor in the larger services economy. And, arguably, the easiest way to retain your talent is to throw more money at them.
5. Earnings season is just starting, but companies are already talking about Brexit. "Of the 13 S&P 500 companies that have reported earnings after the results of the 'Brexit' vote were announced (after June 23), 6 discussed 'Brexit' or 'UK referendum' during their earnings conference calls," wrote John Butters of FactSet.
6. The Japanese yen plunged after Prime Minister Shinzo Abe ordered a new round of fiscal stimulus spending. The currency was weaker against the US dollar by roughly 2% at 102.80 per dollar.
Additionally:

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The pound is soaring after confirmation that Theresa May will be Britain's new prime minister

The pound is soaring after confirmation that Theresa May will be Britain's new prime minister

The British pound is on a charge on Tuesday morning after the confirmation that Theresa May is the new leader of the Conservative Party, and will take over the role of Prime Minister from Wednesday, when incumbent David Cameron will step down from the post.
Markets are reacting positively to the news of May's appointment as it brings some semblance of stability back to the British political landscape, which in the last three weeks has witnessed a vote to leave the European Union, the resignation of Cameron, a Tory party leadership race, and a challenge against Labour party leader Jeremy Corbyn.
As a result of the relative stability May's appointment will likely bring, the pound is strongly higher, up by around 1.1% against the dollar at around 8:45 a.m. BST (3:345 a.m. ET) to trade at $1.3133, a one-week high.
Here is how that move looks:
pound july 12 1Investing.com
Sterling's rally on the day extends gains seen on Monday when it first became clear that May would take the premiership. After May's only other challenger for the Tory leadership, Andrea Leadsom dropped out of the race at 12:15 p.m. BST (7:15 a.m. ET) on Monday, sterling took off.
While sterling has rallied on Tuesday, it is still hugely depressed against virtually all major currencies, following its crash after Britain voted to leave the EU. On the day the referendum's result was confirmed, sterling fell off a cliff, losing more than 10% in a single session and dropping to lows not seen against the dollar in more than three decades. Sterling closed at around $1.36 on the Friday of the result, so is down around another 4% since then.
In the medium term, it is expected that the pound will likely continue to fall against most major currencies, with predictions of the currency's bottom ranging from $1.20 at Goldman Sachs, to$1.15 from Deutsche Bank, all the way to $1, a prediction made by former PIMCO executive Mohammed El-Erian.

Italy's economy faces 2 completely lost decades

Italy's economy faces 2 completely lost decades

Sad italian fanReuters/Staff
The Italian economy faces almost two decades of stagnation and pain, and will not see a return to its pre-financial crisis levels until at least 2025, according to new analysis released by the International Monetary Fund on Monday night.
In the IMF's latest report on the state of the Italian economy, the organisation forecasts growth of less than 1% in 2016, down from 1.1% at its last estimate, and growth of just 1% in 2017, when previous expectations had been of growth around 1.25%.
Those numbers are just part of a long-term trend that has seen the country undershoot all of its major European competitors in economic growth terms. Everything from productivity growth to unit labour costs are worse in Italy than they are in the rest of Europe's major economies, and that is having a huge drag on the country.
Here is what the IMF's report on Italy says (emphasis ours):
"The economy has started to recover from a prolonged recession. The recovery, however, is modest and fragile, against the backdrop of long-standing structural rigidities, strained bank balance sheets, and high public debt that leave very little room to cope with shocks.On current projections, the economy is not expected to return to its pre-crisis (2007) output peak until the mid-2020s, implying nearly two lost decades, a growing income gap with euro zone partners, and a protracted period of balance sheet vulnerability."
And here is the IMF chart showing just how far behind the rest of Europe Italy is:
Italy GDPIMF
Growth may be pretty stagnant in the country, but Italy remains the third-largest economy in the eurozone, and the eighth largest in the world. As a result, concerns that the country's stuttering economy could drag on the rest of Europe are rife.
Along with the poor state of the general economy, the country's financial sector is on the brink of collapse, and a referendum on constitutional reforms in October has the potential to topple prime minister Matteo Renzi's government and cause an unprecedented political crisis.
All of this has sparked fears that Italy could be the country to spark the eventual collapse of the European Project, notably from notoriously bearish Societe Generale strategist Albert Edwards, who last week described Italy as the "weak point in the eurozone both economically and politically."
The IMF echoes those concerns, which notes in its report that Italy is "in a weak position to adapt to the enormous global trade and technological changes" that have occurred in recent years. Here's more from the Fund on one of the key sources of Italy's problems:
"Structural rigidities—not least product and service market inefficiencies, wage growth in excess of productivity, high taxation, an inefficient public sector, and lengthy judicial processes—have contributed to Italy experiencing one of the lowest productivity growth rates among advanced economies over the last three decades. Reforms lagged or were piecemeal, and generally failed to address rigidities. This left Italy in a weak position to adapt to the enormous global trade and technological changes that occurred during this period."

The Hague just threw out Beijing's '9-dash line' in the South China Sea ruling

The Hague just threw out Beijing's '9-dash line' in the South China Sea ruling

skitched 9 dashChina's "nine-dash line." CSIS/David Choi/Business Insider
WASHINGTON — In a highly anticipated ruling, a Hague-based international tribunal found that Beijing's so-called nine-dash line of its territorial claims in the South China Sea had no legal basis.
The tribunal also ruled on Tuesday that Beijing had violated international law by "causing severe harm to the coral reef environment."
The Permanent Court of Arbitration issued a 500-page unanimous ruling in Republic of Philippines v. People's Republic of China, a case brought by the Philippines in 2013.
Manila's 15-point case critically asked the tribunal to rule on the status of China's nine-dash line, a boundary that is the basis for its 69-year-old claim to roughly 85% of the South China Sea.
Territorial claims from Vietnam, Malaysia, Indonesia, Brunei, the Philippines, Taiwan, and China make the South China Sea one of the most disputed places on the planet.
scs skitchReuters/Amanda Macias/Business Insider
China, which  claims the lion's share  of the region,  has boycotted prior hearings. Foreign Ministry spokesman Lu Kang told reporters ahead of the ruling, "We won't accept any" of the court's "so-called materials, no matter what they are."
"No matter what kind of ruling is to be made, Chinese armed forces will firmly safeguard national sovereignty, security, and maritime interests and rights, firmly uphold regional peace and stability, and deal with all kinds of threats and challenges," China's Defense Ministry said in a statement.
Even if Beijing continues to ignore the decision, the ruling is significant. It is the first time a legal challenge has been brought in the dispute, which covers some of the world's most promising oil and gas fields and vital fishing grounds. 

'A complete and total victory for the Philippines'

Dredgers deposit sand on the northern rim of the Mischief Reef, located 216 km (135 miles) west of the Philippine island of Palawan, in this Center for Strategic and International Studies (CSIS) Asia Maritime Transparency Initiative satellite image taken on February 1, 2015 and released to Reuters on April 9, 2015.  REUTERS/CSIS's Asia Maritime Transparency Initiative/Digital Globe/Handout  Satellite image of dredgers depositing sand on the northern rim of the Mischief Reef. Thomson Reuters
Tuesday's ruling reflects the shifting balance of power in the 3.5-million-square-kilometer sea, where China has been expanding its presence by building artificial islands and dispatching patrol boats that keep Philippine fishing vessels away. 
"The award is a complete and total victory for the Philippines," Paul Reichler, the lead counsel for Manila in its arbitration case against Beijing's South China Sea claims, said in a statement. "On every significant issue in the case the Philippines prevailed."
"This award represents a devastating legal blow to China's jurisdictional claims in the South China Sea," Ian Storey of Singapore's ISEAS Yusof Ishak Institute, told Reuters.
He added: " China will respond with fury, certainly in terms of rhetoric and possibly through more aggressive actions at sea ."
While Tuesday's case in The Hague was between the Philippines and China, other claimants such as  Taiwan, Vietnam, Malaysia, and Brunei could file similar cases.

A little bit about these waters

The South China Sea will undoubtedly be the battleground of the future, and the various territorial claims make it one of the most militarized regions in the world.
us military csis south china seaUS assets and personnel deployed in Hawaii, Alaska, and Guam are also devoted to the safety and security of the region. Asia Maritime Transparency Initiative
The tit for tat over crumbs of land in the South China Sea's waters isn't for nothing, with the area home to $5 trillion in annual global trade.
According to Robert Kaplan, an author and geopolitical analyst, "the South China Sea functions as the throat of the western Pacific and Indian Oceans — the mass of connective economic tissue where global sea routes coalesce."
"More than half of the world's annual merchant fleet tonnage passes through these choke points, and a third of all maritime traffic worldwide," Kaplan wrote in "Asia's Cauldron: The South China Sea and the End of a Stable Pacific."
What's more: The South China Sea has proven oil reserves of 7 billion barrels as well as an estimated 900 trillion cubic feet of natural gas, according to Kaplan.
And if Chinese calculations are correct, then the South China Sea will ultimately yield 130 billion barrels of oil — second only to Saudi Arabia — making the South China Sea "the second Persian Gulf."
China, by far, has helped itself to the largest slice of cake in the South China Sea, staking out its claim with its nine-dash line.
All the while, Chinese President Xi Jinping has steadily consolidated the world's largest military, coupled with roughly$356 billion in military spending power.
That spending has aided China in continuing to dredge islands and equip them with runways and radar towers.
In short, prior to tribunal's ruling, China was dominating the maritime heart of Southeast Asia.

Meanwhile in Beijing ...

AP_16194407526855Lu Kang, spokesman of the Chinese Ministry of Foreign Affairs, talking to reporters at a news briefing in Beijing about the international tribunal's ruling on the South China Sea. AP
Shortly before the ruling was announced, China's state-run Xinhua news agency claimed a Chinese civilian aircraft successfully carried out calibration tests on two new airports on the disputed Spratly Islands.
Then, China's Defense Ministry announced that a new guided missile destroyer, which has responsibility for theSouthChinaSea, was commissioned at a naval base near Hainan island.
China 's Foreign Ministry spokesperson, Lu Kang, said in a statement Tuesday that the US has been using international law only for its own interests. He suggested this manipulation has severely eroded the authority, solemnity, and validity of international law.
US diplomatic, military and intelligence officers said China's reaction to the court's decision would largely determine how other claimants, as well as the US, respond.
If, for example, China accelerates or escalates its military activities in the disputed area, the US and other nations would have little choice but to respond with new and possibly enlarged and multinational maritime freedom of navigation and aerial missions, the US officials said, speaking on the condition of anonymity.
Contingency planning for such exercises was already completed or was in its final stages, said one of the officials, who quickly added: "We hope it doesn't come to that."

Here's the full ruling:

Reuters contributed to this report.

Monday, July 11, 2016

Japanese stocks go nuts on stimulus expectations and Pokémon mania sends Nintendo soaring

Japanese stocks go nuts on stimulus expectations and Pokémon mania sends Nintendo soaring

YAN WALTON/AFP/Getty Images
Japanese stocks have gone nuts on Monday, fueled by hopes for additional fiscal and monetary stimulus following a crushing victory for the ruling Liberal Democratic party in Upper house elections held over the weekend.
The benchmark Nikkei 225 index finished the session up 3.98% at 15,708.82, recording its largest one-day percentage increase since March 2.
One individual stock that drew attention around the world was Nintendo. Its shares were up more than 20% because of the incredible popularity of Pokémon Go, its new mobile game which is taking the world by storm.
Despite the enormous rally, the index is only back to the levels seen this time last week.
Nikkei 225 Hourly Chart
On top of the positive lead provided by US and European markets on Friday, the gains were fueled by hopes for additional fiscal stimulus following Japanese upper house elections held over the weekend, something that delivered the ruling coalition a landslide victory.
The victory will still bolster [Shinzo] Abe’s grip over the conservative party that he led back to power in 2012 promising to reboot the economy with hyper-easy monetary policy, fiscal spending and reforms, said Reuters.
Prime minister Shinzo Abe had cast the election as a referendum on “Abenomics”, the policy that began in 2012 to boost the Japanese economy through the so-called “three arrows” of fiscal stimulus, monetary easing and structural reforms.
Following the decisive election result, Abe told reporters on Monday that he will instruct economy minister Ishihara to compile an additional economic stimulus package on Tuesday.
While he stopped short of detailing how large the fiscal package would be, Abe stipulated that he plans to speed up railway infrastructure investment, using construction bonds to fund the stimulus package.
Further helping to bolster stock market gains was the visit of former US Federal Reserve chair, Ben Bernanke, to the Bank of Japan on Monday.
While a scheduled visit, the meeting has helped to boost sentiment that the Bank of Japan will loosen monetary policy settings even further following the election result.
According to Reuters, citing sources familiar with the visit, Bernanke is expected to meet with BOJ governor Kuroda, along with Japanese prime minister Shinzo Abe.
The Bank of Japan will announce its next monetary policy decision on July 29.
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Chinese inflation and a grim global outlook point to more policy stimulus from the PBOC

Chinese inflation and a grim global outlook point to more policy stimulus from the PBOC

Photo: China Photos/Getty Images.
The confluence over the weekend of the release of weak price data from China and a grim summary of the global economic outlook from the G20 trade ministers meeting in Shanghai suggests more easing from the People’s BAnk of China is likely.
The release of the June consumer price data showed China’s inflation rate remains under downward pressure. The annual rate of increase for consumer prices fell to a 5 month low of 1.9% in June from 2% in May, data from the National Bureau of Statistics showed.
Food prices eased again and were up on 4.6% which though still high is a sharp deceleration on the 5.9% pace the month before as the pace of pork price growth continues to slow. The data showed the price of pork fell from May’s 33.6% rise to a still mind-boggling 30.1% for the Chinese staple.
Non-food prices rose just 1.1%.
Source: tradingeconomics.com
Producer prices in China extended their run of deflation to 51 months with a print of -2.8% in June.
Taken together this – along with some incredibly bearish comments from China’s trade Gao Hucheng about the outlook for global growth – points to an increasing chance of more stimulus from China’s central bank.
Reuters reports Gao said the global economic recovery remained “complicated and grim”.
“Global trade is dithering, international investment has yet to recover to levels before the financial crisis, the global economy has yet to find the propulsion for strong and sustainable growth,” Gao said.
That’s going to make the achievement of China’s growth target problematic.
Zhou Hao, senior Asia emerging market economist at Commerzbank in Singapore, said in a note to clients over the weekend that while China is still reiterating the need for supply-side reform “authorities still need to stimulate demand in order to achieve its growth target”.
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Friday, July 8, 2016

One statistic that shows just how insane VC investment has gotten

One statistic that shows just how insane VC investment has gotten

We've been hearing the same narrative out of the venture capital industry for at least six months now: late-stage companies are staying private and stockpiling massive sums. As their valuations climb higher, we keep getting vague answers about when they'll go public, if ever.
This has been the narrative for the first half of 2016, and one that doesn't show signs of changing anytime soon, especially when you consider this: the second quarter of 2016 saw such a massive amount of VC activity that it safely eclipses any quarter, ever, since 2010.
The amount? A totally insane $22.3 billion.
That number is according to research firm PitchBook, which tracked VC data over each quarter of the last six years. While the increase in investment has remained fairly steady over time (except for a big jump between the first and second quarters of 2014, when it rose from about $13 billion to nearly $20 billion), the second quarter of this year shows that we've now reached a staggering new high. 
In fact, 39% of venture capital went to the unicorns in the second quarter — the largest proportion ever.
Pitchbook VC fundingPitchbook
This increase in investment runs parallel to a few other interesting trends: Not only has the number of deals closed seen a sharp and steady decline since halfway through 2015, but specifically, the number of angel and seed deal flow hit their lowest point in nearly five years.
Why? Because unicorns are (still) hot. VC money is increasingly being pushed toward more mature companies with some momentum, making funding for seed stage companies hyper-competitive. 
And as mature startups continue to amass tons of capital and keep their lips sealed about their future plans, there's no saying for sure when things will change.

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