Wednesday, January 4, 2017

Wednesday, January 4, Night Wall Street Roundup: Wall St. Climbs; Fed Minutes Confirm Inflation Jitters

By Noel Randewich
Reuters
January 4, 2017

U.S. shares ended higher on Wednesday even after minutes from the Federal Reserve's December meeting showed concerns that quicker economic growth under President-elect Donald Trump could require faster interest rate increases to ward off inflation.

U.S. stocks have surged over the past two months on expectations that Trump will stimulate the economy with tax cuts and infrastructure spending and eliminate regulations in the financial industry.

But investors also worry that Trump's measures could stir inflation and push the U.S. central bank to raise rates more aggressively than anticipated.

"Clearly, some of the members on the committee are taking a look at proposed fiscal changes, whether that's tax cuts or infrastructure spending,” said Chris Zaccarelli, Chief Investment Officer for Cornerstone Financial Partners. "It's confirmation of what people were already expecting."

Extremely low interest rates have fueled a rally of over 200 percent in the S&P 500 since the 2008 financial crisis, and investors worry that raising rates will crimp future increases.

With just over two weeks left before Trump takes office, and the Dow Jones Industrial Average closing in on the 20,000 mark for the first time, investors also say they need to see evidence that his campaign-trail promises will be approved by Republican lawmakers.

The Dow Jones Industrial Average .DJI rose 0.3 percent to end at 19,942.16, while the S&P 500 .SPX gained 0.57 percent to 2,270.75. The Nasdaq Composite .IXIC added 0.88 percent to 5,477.01.

After the bell, Macy's (M.N) cut its 2016 earnings outlook, blaming weakness in handbags and watches. Its stock dropped 8.3 percent in extended trade, while Nordstrom (JWN.N) lost 6 percent and JC Penney (JCP.N) fell 4.4 percent.

Since Trump unexpectedly won his bid for the White House on Nov. 8, the S&P has gained over 6 percent and the Dow has rallied nearly 9 percent.

In Wednesday's session, the materials index .SPLRCM rallied 1.39 percent, its best day in nearly a month.

The S&P 500 consumer discretionary sector .SPLRCD rose 1.33 percent, helped by gains in automakers. Both General Motors (GM.N) and Ford (F.N) rose over 4 percent after posting better-than-expected U.S. sales in December.

Nine of the 11 major S&P 500 sectors were higher, with just the energy .SPNY and telecommunications .SPLRCL sectors in negative territory.

Gilead Sciences (GILD.O) jumped 2.99 percent after the biopharmaceutical company named a new oncology chief.

Comcast (CMCSA.O) rose 1.19 percent after Macquarie raised its price target.

Advancing issues outnumbered declining ones on the NYSE by a 5.84-to-1 ratio; on Nasdaq, a 3.44-to-1 ratio favored advancers.

The S&P 500 posted 27 new 52-week highs and no new lows; the Nasdaq Composite recorded 160 new highs and 18 new lows.

About 7.0 billion shares changed hands in U.S. exchanges, more than the 6.8 billion daily average over the last 20 sessions.


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Oil Prices Rise On Expected Drop In U.S. Crude Inventories

By Jessica Resnick-Ault
Reuters
January 4, 2017

Oil prices ticked higher on Wednesday on expectations that U.S. crude inventories have dropped and on signs that the world's top oil exporters will stick to agreed output cuts that took effect this week.

Global benchmark Brent crude futures LCOc1 rose 28 cents to $55.75 a barrel, a 0.5 percent gain. U.S. West Texas Intermediate crude futures CLc1 gained 25 cents, or 0.5 percent, at $52.58 a barrel.

Both benchmarks recovered some losses from the previous day - when the U.S.-dollar .DXY hit a 14-year peak and knocked oil from 18-month highs - as the greenback dipped on Wednesday, making dollar-denominated fuel purchases in other currencies cheaper. [/USD]

Weekly U.S. industry and government reports are expected to show a 1.7 million-barrel crude draw for last week, analysts polled by Reuters said ahead of the data due late Wednesday and on Thursday. [EIA/S]

"We are expecting a draw," said Tariq Zahir, managing member of Tyche Capital Advisors in New York.

Oil companies likely drew down inventories in the final week of the year for tax-related reasons, which could lead prices to spike after inventory data is released.

OPEC member Kuwait also lifted expectations that producers will comply with a deal to reduce oversupply after its state-owned oil producer said on Wednesday it would cut output in the first quarter.

Members of the Organization of the Petroleum Exporting Countries in November agreed their first output cut since 2008 in an attempt to stabilize oil prices.

As part of the deal, Kuwait has to reduce output by 131,000 barrels per day.

An OPEC committee meeting to monitor compliance with the agreement is scheduled for Jan. 21-22 in Vienna.

"Prices are likely to remain volatile until there is evidence that quotas are being adhered to," analysts at Cenkos Securities wrote.

Zahir cautioned that increased oil production from OPEC member Libya has come online faster than anticipated and may deter some OPEC members from cutting their own output.

Also reflecting a tightening market, traders expect top oil exporter Saudi Arabia to raise the official selling price for its crude to Asia in February.


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Total Global Debt Tops 325 Percent Of GDP As Government Debt Jumps

By Dion Rabouin
Reuters
January 4, 2017

Global debt levels rose to more than 325 percent of the world's gross domestic product last year as government debt rose sharply, a report from the Institute for International Finance showed on Wednesday.

The IIF's report found that global debt had risen more than $11 trillion in the first nine months of 2016 to more than $217 trillion. The report also found that general government debt accounted for nearly half of the total increase.

Emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. China accounted for the lion's share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.

Higher borrowing costs in the wake of the U.S. presidential election and other stresses, including "an environment of subdued growth and still-weak corporate profitability, a stronger (U.S. dollar), rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness" presented challenges for borrowers, the IIF said in its report.

Additionally, "a shift toward more protectionist policies could also weigh on global financial flows, adding to these vulnerabilities," the IIF said. "Moreover, given the importance of the City of London in debt issuance and derivatives (particularly for European and EM firms), ongoing uncertainties surrounding the timing and nature of the Brexit process could pose additional risks including a higher cost of borrowing and higher hedging costs."


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Fears Of Protectionist Trump Drive Mexico Peso To New Low

By Miguel Gutierrez
Reuters
January 4, 2017

Mexico's peso hit a new record low on Wednesday, falling more than 1.5 percent amid ongoing uncertainty over U.S. President-elect Donald Trump's eventual policies and in anticipation of an address by the Mexican president.

The peso MXN= MXN=D2 dropped as low as 21.4750 per dollar, after pushing past the previous low of 21.395 per greenback set on Nov. 11, soon after Trump's surprise Nov. 8 election victory. It later pared losses slightly.

On Tuesday, the peso was rocked by Ford Motor Co.'s decision to cancel a planned $1.6 billion investment in central Mexico, while fears over inflation have been stirred by a major fuel price hike that took effect on Jan. 1.

"With this Ford announcement, markets are clearly seeing the risk of protectionist measures toward Mexico," said Juan Carlos Alderete, a strategist at Banorte-IXE.

"A scenario in which Trump is very aggressive in terms of policies toward Mexico is not yet priced into the market, and the Ford announcement reflects that," he added.

Trump's election win drove the Mexican currency lower amid a sell-off fueled by his threats to scrap a trade deal between Mexico and the United States, and to levy punitive tariffs on Mexican-made goods.

He railed against Mexico on the campaign trail, threatening to halt transfers from Mexican nationals in the United States unless Mexico agreed to pay for the massive wall he has vowed to build on the U.S. southern border to keep out illegal immigrants.

The Mexican fuel price increase stemmed from the finance ministry's decision to put an end to government-set prices, but the size pf the rises also spurred some protests in Mexico, prompting speculation that the government could seek to stagger the increase.

So far, officials have ruled out any such move.

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Boeing Gets $8.25 Billion Order For 737 MAX 8 Planes From GE Leasing

Reuters
January 4, 2017

Boeing Co (BA.N) said on Wednesday it had received an order for 75 of its 737 MAX 8 aircraft, valued at $8.25 billion at list prices, from General Electric Co's (GE.N) commercial aircraft leasing and financing arm.

The deal increases firm orders from GE Capital Aviation Services for the latest generation of Boeing's best-selling 737 aircraft to 170, Boeing said. (bit.ly/2j9PoRi)

Boeing has received 3,419 orders for the 737 MAX so far. The first 737 MAX is expected to be delivered in first half of 2017.

Boeing's shares were up about 1 percent at $158.49 in early afternoon trading. Up to Tuesday's close, the stock had risen 11.7 percent in the past 12 months, compared with a 12.2 percent rise in the S&P 500 index .SPX.


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No Brexit Panic Yet As Foreigners Buy UK Bonds At Record Pace

By Jamie McGeever and Andy Bruce
Reuters
January 4, 2016

Britain's shock vote to leave the European Union has yet to scare off overseas investors, who are snapping up British government bonds at the fastest pace on record, figures on Wednesday showed.

This suggests that foreigners have doubled down on gilts and are taking advantage of the slide in sterling since the June 23 Brexit vote to load up on assets that are now around 20 percent cheaper.

The pound's steep fall is also likely to have forced central banks to buy more British bonds in order to stick to their mandates and keep the sterling weighting of their foreign exchange reserves steady, analysts said.

The BoE figures show, however, that domestic investors are going completely the other way and selling British government bonds at the fastest pace on record.

Overseas investors bought 15.61 billion pounds ($19 billion)of gilts in November last year, the highest for a single month since October the year before, the BoE said.

That brought the rolling three-month total purchases up to 39.43 billion pounds, the highest since BoE records began in 1986, Reuters calculations show.

Domestic investors sold 14.61 billion pounds of gilts, bringing the three-month rolling total sales to 67.68 billion pounds, also the highest since 1986.

"With the currency so cheap, it looks like overseas investors have bought heavily on a non-hedged basis," said Antoine Bouvet, rates strategist at Mizuho Securities in London.

"The slide in sterling helped the stock market move higher, so perhaps there was some reallocation among domestic investors there too," he said.

Britain's benchmark FTSE 100, which derives some 70 percent of its earnings from abroad and therefore benefits from a lower pound, hit its highest ever closing level this week .FTSE.

The Brexit shock initially sent sterling, stocks and gilt yields tumbling, and prompted the BoE to cut interest rates to a new low and revive its bond-buying stimulus program.

Alan Clarke, UK and euro zone economist at Scotiabank, noted that holdings of gilts at British insurers and pension funds decreased markedly after they started selling gilts to the BoE in 2009.

The latest BoE data showing a big drop in domestic gilt holdings may signal a renewal of this trend, Clarke said, reflecting the BoE expanding its gilt purchases program by 40 billion pounds in August 2016.

By contrast, some overseas central banks and sovereign wealth funds will have been under pressure to top up sterling portfolios battered by the pound's post-Brexit vote plunge.

"It's a currency effect - gilts are cheaper to buy but also a lot of these overseas investors are mandated to maintain a certain percentage of their portfolios in sterling assets, which means they have been compelled to buy gilts," Clarke said.

While stocks and bond yields have recovered GB10YT=RR since last June, the pound has remained under the cosh GBP= and was the worst-performing major currency in the world last year.

Britain's current account deficit is 5.9 percent of gross domestic product, meaning Britain relies on "the kindness of strangers", in the words of BoE governor Mark Carney, to balance its books.


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Wednesday, January 4, Morning Global Market Roundup: Strong Dollar Lifts Japan Shares, Crimps Commodities

By Wayne Cole
Reuters
January 4, 2017

The U.S. dollar crept nearer to 14-year peaks on Wednesday as an abundance of upbeat global economic data boosted Wall Street and signs of quickening inflation dented fixed-income debt.

The strength of the U.S. currency pressured commodity prices and helped drag oil off an 18-month top, but gave Japan's exporter-heavy stock market a fillip.

The Nikkei climbed 2.1 percent, recovering from two sessions of losses as domestic data showed factory activity expanded at the fastest pace in a year.

Markets elsewhere in Asia were more hesitant having already rallied on Tuesday. MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.1 percent and trying to string together a seventh straight session of gains.

The brightening mood followed a round of upbeat factory surveys from China, the euro zone and United States. Analysts at Barclays said their measure of global manufacturing confidence hit its highest since December 2013.

U.S. factory activity sped to a two-year high amid a surge in new orders, while manufacturing in the euro zone grew at its fastest pace in five years.

Notably, the U.S. ISM showed a sharp pick up in raw material prices which stoked speculation the Trump Administration's proposed stimulus measures will generate more inflation.

Wall Street's rally was further aided by gains in Verizon Communications and technology companies Alphabet and Facebook. The Dow ended Tuesday up 0.6 percent, while the S&P 500 gained 0.85 percent and the Nasdaq 0.85 percent.

Ford Motor jumped 3.79 percent on news it would cancel a planned $1.6-billion factory in Mexico and invest $700 million at a Michigan factory, after Trump had harshly criticized the Mexico investment plan.

The same news slugged the Mexican peso, leaving it at its lowest-ever close against the U.S. dollar.

Dollar In Demand

The dollar's strength was broad-based and it hit a 14-year peak on a basket of currencies at 103.82 before profit-taking pulled it back a touch to 103.40.

After an early pause on the yen, the U.S. currency edged up to 118.08 and back toward major chart resistance around 118.60/66. A floundering euro was pinned at $1.0395, having dived as deep as $1.0342 overnight.

The euro's decline came despite a jump in domestic bond yields after data showed German inflation hit its highest level in more than three years in December.

While much of the increase was due to transitory factors such as energy, long-term inflation expectations still rose to their highest since December 2015.

Overall euro zone numbers due later Wednesday are expected to show inflation picked up to an annual 1 percent, from 0.6 percent previously.

German 10-year bond yields leaped 10 basis points to a two-week high of 0.29 percent.

In commodity markets, the dollar's ascent caused losses for everything from copper to iron ore, though oil prices steadied after losing more than 2 percent on Tuesday.

U.S. crude clawed back 31 cents to stand at $52.64 a barrel, while Brent futures added 32 cents to $55.79.


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Oil Prices Edge Up On Expectations Of Tightening Supplies

By Henning Gloystein
Reuters
January 4, 2017

Oil edged higher on Wednesday, with top exporter Saudi Arabia expected to raise prices for its crude as part of planned supply cuts, although a strong dollar and moderate economic growth prospects restricted gains.

U.S. West Texas Intermediate (WTI) crude futures CLc1 were trading at $52.65 per barrel, up 32 cents, or 0.6 percent, from the last settlement.

International Brent crude futures LCOc1 were up 32 cents, or 0.6 percent, at $55.79 a barrel.

Traders said the gains were due to an expected tightening of physical oil supplies, as major producers like the Organization of the Petroleum Exporting Countries (OPEC) plan to cut crude output from this month in an effort to end a global fuel glut that has dogged markets for over two years.

Potentially reflecting a tightening market, top oil exporter Saudi Arabia is expected to raise the official selling price (OSP) for all its crude grades to Asia in February.

OSPs for crude delivered to customers around the world are a key indicator in determining the prices for crude futures like Brent or WTI.

"Crude oil has risen... on expectations of reduced supply excess," said Fawad Razaqzada, market analyst at futures brokerage Forex.com.

Despite the potentially tightening physical oil market, crude futures are being weighed down by a strong U.S.-dollar, which makes it more expensive for countries to import dollar-traded fuel.

The dollar hit a 14-year peak .DXY this week on the back of strong U.S. economic data.

"The dollar remains supported due to the fact that the Fed has not only turned hawkish but it has already started its policy tightening cycle, while the rest of the major central banks are pretty much dovish across the board," Razaqzada said.

Both foreign exchange and crude movements will be impacted by the status of the global economy.

Despite encouraging figures in late 2016 and the first days of this year, analysts said that growth prospects were moderate.

"The West ended 2016 on a strong note. The Eurozone picked up steam, the UK is defying gravity and the U.S. is on a roll. Note, however, that this strength isn't fully feeding through into Asia.. China and Japan are expanding, sure, but only at a tepid pace," said Frederic Neumann, co-head of Asia Economics Research at HSBC in Hong Kong.


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Here's Why Analysts Are Bullish On Gas Despite New Year Jitters

Rally from 2016 cut short on a warmer forecast for January; Some analysts see bullish case on Mexico pipelines, LNG export.


By Christine Buurma and Naureen Malik
Bloomberg
January 4, 2017

Natural gas prices may have faltered in the first trading day of the year, but some analysts are still bullish on the outlook for 2017.

With demand for the power-plant fuel surpassing coal for the first time in the U.S. and exports soaring, a years-long glut from shale formations has finally been erased. Now, all natural gas needs is a good, cold winter.

Traders are watching closely to see how the commodity, which recorded its biggest rally in 11 years after stockpiles fell below their five-year average, holds up against a warm weather forecast running through Jan. 17, typically the coldest time of year. Tim Evans, an analyst at Citi Futures Perspective in New York, said he believes the stockpile deficit could even grow as winter plays out through the end of January and into February.

“Demand is up and supply is down," Evans said in a telephone interview. “It pays to watch the details of what we’ve got going on the supply side, on the export levels to Mexico and the exports of LNG.”

Gas futures on Tuesday plunged by the most in almost three years after forecasts released earlier for a deep freeze across the U.S. suddenly turned milder. Prior to that point, gas prices were expected to average $3.18 per million British thermal units, a 25 percent increase over 2016, based on median of 22 analyst estimates compiled by Bloomberg.

Still, Evans remains unfazed. “If we do get another cycle of cold this winter, say later in January or into February, then natural gas prices are going to go back on the upswing in a volatile fashion. This is what natural gas trading entails: we rally for three weeks and drop like a rock."



In 2016, gas deliveries to Mexico swelled by 31 percent from January through October year- over-year, to a record 1.1 trillion cubic feet, according to the most recent Energy Information Administration data. This occurred as Mexico deregulated its energy market, making it easier to develop pipeline projects to meet the demand of power companies seeking to switch to a lower cost, less dirty fuel.

In May, low-cost shale gas began heading south via Petroleos Mexicanos’s Los Ramones Phase II pipeline, projected to boost U.S. gas deliveries south of the border by as much as 22 percent, according to Bloomberg New Energy Finance.

“Forget about Mexico paying for a border wall," said Stephen Schork, president of the Schork Group Inc., an energy consulting company in Villanova, Pennsylvania. "They’re building pipeline infrastructure to import more U.S. gas. We’re finally getting around to a really robust demand scenario for U.S. gas supply.”

Meanwhile, gas cargoes from Cheniere Energy Inc.’s Sabine Pass terminal in Louisiana, which became operational in February, have headed to South America, the Middle East and Asia, the world’s biggest LNG market. More than half of U.S. LNG export capacity slated to be online by 2020 has been contracted to Asian buyers as a recent expansion of the Panama Canal cuts travel time to the region, according to Bloomberg New Energy Finance.

Domestic U.S. gas use is also on the rise. The nation’s power plants are burning record amounts of the fuel as coal-fired plants shut in response to environmental regulations and competition from cheap gas and renewable energy. New plants that produce fertilizer and methanol, used to make plastics and other chemical products, are also cropping up along the Gulf Coast, sending gas consumption higher.



While warmer winter temperatures will continue to be a major risk to a 2017 gas rally, shale supply also is a concern. Production dropped last year as drillers cut costs after prices tumbled to historic lows in March, but output has started to recover. The number of rigs drilling for gas in the U.S. has jumped more than 60 percent after sliding in August to the lowest in data going back to 1987, data from Baker Hughes Inc. show.

Still, the stockpile deficit won’t disappear anytime soon, according to Bank of America Corp.

“The U.S. natural balance is tightening rapidly on falling production and strong structural demand growth, especially from LNG export facilities,” Bank of America analysts led by Francisco Blanch in New York said in a note to clients Dec. 8. “Stocks will likely normalize by the end of this winter and then move to a large deficit by end of October, which may last well into 2018.”


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Samsung's Chip, Screen Sales To Drive Q4 Profit To 3-Year High

By Se Young Lee 
Reuters
January 4, 2017

Samsung Electronics Co Ltd is likely to forecast its best quarterly profit in nearly three years on Friday, analysts said, with robust memory chip sales easing the pain of the costly failure of a flagship smartphone.

The South Korean firm discontinued sales of the Galaxy Note 7 phones after some of the devices caught fire, warning of a $2.1 billion hit to its profit in the fourth quarter of 2016 due to expenses tied to an ongoing global recall and lost sales.

But investors are betting a surge in sales of memory chips and organic light-emitting diode screens for smartphones will translate to strong earnings growth for the October-December period and through 2017.

Samsung's operating profit likely rose for a second straight quarter to 8.4 trillion won ($7 billion) over October-December, according to a Thomson Reuters StarMine SmartEstimate derived from a survey of 15 analysts, up 37 percent from a year ago and the highest since the first quarter of 2014.

"We look for the memory business to post a big earnings improvement and contribute 50 percent of its (Samsung's) total operating profit for Q416," Daiwa said in a report.

Memory chip prices have spiked recently on demand for more firepower on mobile devices. But it is the sales of the higher-end 3D NAND chips which have rallied significantly, helping Samsung rake in profits given it is ahead of its rivals such as Toshiba Corp and SK Hynix in the mass production of these chips, analysts said.

Samsung's semiconductor profit likely surged to a record 4.5 trillion won for the fourth quarter and 13.1 trillion won for 2016, Eugene Investment said in a report, adding chip earnings will grow further this year on firm demand.

HDC Asset Management's fund manager Park Jung-hoon agreed that the components business outlook appeared "pretty solid".

"We'll have to see how the mobile business does ... but I think Samsung's operating profit should be able to come in somewhere around mid-30 trillion won range (this year)."

For the recently ended quarter, Samsung's mobile earnings likely rebounded from the dismal third quarter on healthy sales of the Galaxy S7 and S7 edge smartphones, analysts said.

Hyundai Securities expects Samsung's mobile division's operating profit at 2.2 trillion won, in line with a year earlier and up sharply from 99 billion won in July-September.

The company's shares hit a record 1.831 million won on Tuesday this week ahead of the earnings forecast on Friday.

They surged 43 percent in 2016 - the most since 2012 - suggesting investors did not expect a serious business impact from Samsung's name being dragged into a growing political scandal in the country.

($1 = 1,206.1500 won)


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Toshiba Hit By Fresh Profit Padding Allegations

By Hideyuki Sano and Naomi Tajitsu
Reuters
January 4, 2017

Toshiba Corp shares fell more than five percent in early trade on Wednesday after media reported the security watchdog suspects the Japanese conglomerate of misreporting profits by 40 billion yen ($339.59 million) over three years.

The revelations add to a series of accounting troubles swirling around Toshiba, which was downgraded by ratings agencies last week after it admitted it may face a multi-billion dollar writedown over its U.S. nuclear business.

The Asahi Shimbun newspaper reported on Tuesday, when Tokyo markets were closed, that the Securities and Exchange Surveillance Commission would present allegations of accounting fraud to prosecutors, who had previously declined to investigate due to a lack of evidence.

The watchdog found that Toshiba had reported profit gains in its computer operations during the 2012-2014 financial years, when the section had not generated any profit, the newspaper reported citing unidentified sources.

Toshiba's two CEOs and a chairman at the helm of the company during that period were involved in the alleged cheating, it added.

The investigation could open the way to formal criminal charges against the company and its former executives.

Officials at Toshiba were not immediately available for comment.

Toshiba shares traded at 288.40 yen, up 1.9 percent, after sliding to 263.05 yen in earlier trade. They have tumbled 35 percent since last week.


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