Market Wraps
Watch For:
MBA Weekly Mortgage Applications Survey; EIA Weekly Petroleum Status Report; FOMC meeting minutes published; Canada Quarterly financial statistics for enterprises; earnings from Analog Devices, Abercrombie & Fitch, Kohl’s, Nvidia
Today’s Headlines/Must Reads
– For Banks, Debt-Ceiling Drama Doesn’t End With a Deal
– Spending Fight Is Main Event in Debt-Ceiling Talks
– Share Buybacks Continue at Torrid Pace While Investors Sit on Sidelines
– Elon Musk Wants to Challenge Google and Microsoft in AI
– U.S., China See Fragile Opportunity to Repair Ties
Opening Call:
Futures were lower in early trading, suggesting Tuesday’s selloff for the S&P would be extended, as debt-ceiling fears lingered.
“Positive sentiment is being restrained by shackles of uncertainty as the U.S. debt ceiling negotiations continue without agreement,” Hargreaves Lansdown said.
“The debt ceiling negotiations are still hanging over the U.S. equity market as dark clouds with no breakthrough yet, but with the VIX Index at around 18.5, the options market is still quite relaxed, but things can change fast as we approach the 1 June deadline,” Saxo Bank said.
Adding to losses on Wednesday were sharp declines in European stocks, alongside a jump in U.K. government bond yields after data showed inflation in Britain slowed to 8.7% in April, but was still higher than expected.
The stubbornly high price pressures in the U.K. pushed expectations for the Bank of England’s peak interest rate to 5.5%, from the current 4.5%, and reminded investors more broadly that the global battle against inflation was not done.
With that in mind, the minutes of the Federal Reserve’s policy meeting in May will be released at 2 p.m.
Stocks to Watch
Agilent Technologies cut its outlook for the fiscal year, saying on a conference call that customers have become more conservative with “CapEx budgets and spending decisions.” The stock was down 8.8.
Intuit reported third-quarter revenue that rose from a year earlier but missed Wall Street forecasts. The stock was down 5.3% in premarket trading.
PacWest gained 7.7% in premarket trading after the bank sold a real-estate lending arm, Civic Financial Services, to Roc360, a real-estate lending firm. The stock rose 7.7% on Tuesday after agreeing to sell a portfolio of 74 real estate construction loans.
Palo Alto Networks reported fiscal third-quarter adjusted earnings that beat analysts’ estimates and the company raised guidance on profit, revenue, and billings for the fiscal year. The stock was 4.3% higher in premarket trading.
Toll Brothers reported fiscal second-quarter earnings of $2.85 a share, beating analysts’ forecasts by a wide margin. Toll shares rose 3.5%.
Urban Outfitters was up 11% after it posted better-than-expected fiscal first-quarter earnings and sales.
Fourth-quarter adjusted earnings at VF topped Wall Street forecasts as sales at The North Face, the company’s outdoor clothing brand, rose 12%, offsetting a sales decline of 14% at shoe brand Vans. The stock rose 3.1%.
Forex:
The dollar was flat ahead of the latest FOMC meeting minutes, but could strengthen after their release, as there is “little to gain” from the Fed emphasising a pause in rate rises, let alone the prospect of future cuts, ING said.
“Like many central bankers around the world, the Fed’s biggest challenge is to get inflation under control.”
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Sterling gained after U.K. inflation data exceeded forecasts, fuelling expectations for further Bank of England interest rate rises.
“With inflation proving stickier than the BOE expected, it now seems all-but certain that the BOE will raise interest rates from 4.50% to 4.75% in June and perhaps a bit further in the months after,” Capital Economics said.
Bonds:
For investors who started building some long duration positions around yield levels of 2.50% for the 10-year Bund yield and 3.75% for 10-year Treasurys, Jefferies recommends keeping those positions over the summer months.
“A small move higher in rates would be expected on a debt deal, but that would be short-lived and pave the path for lower rates over summer,” Jefferies said.
Valuations are getting attractive for a long position, seasonality turns favourable fixed income from the second half of June onwards and central banks are close to or have already reached the end of their rate hiking cycle, it said.
Energy:
Oil prices posted more solid gain in Europe after the latest API data showed U.S. crude stocks fell by 6.8 million barrels last week, while gasoline stocks dropped by 6.4 million barrels. That would be a third consecutive weekly decline, if Department of Energy data later Wednesday confirms the figures.
Meanwhile, comments from Saudi Arabia’s energy minister that oil short-sellers should “watch out” were interpreted as an implicit threat that the cartel might cut production, adding support to prices.
Metals:
Base metals were mixed, with gold flat, as investors awaited the release of the latest Fed meeting minutes.
Goldman Sachs said it expected short-term price weakness for industrial metals due to the weakness in western economies. However, it added that a recovery in Chinese imports should boost prices later in the year, with local inventories being run down.
“That inevitably is feeding a mounting incentive for imports,” Goldman Sachs said. It added that its three-month price target for copper is $7,750 a ton but this rises to $9,200 a ton in six months.
Today’s Top Headlines
Elon Musk Wants to Challenge Google and Microsoft in AI
Elon Musk said he sees the need for an artificial-intelligence business to rival Google and Microsoft that could involve different parts of his corporate empire, including Twitter, which he predicted could halt its losses as soon as next month.
Musk made the comments during The Wall Street Journal’s CEO Council Summit in London and teased a Twitter event involving presumptive presidential candidate Ron DeSantis. The Florida governor is expected to announce his 2024 presidential bid during a Wednesday evening Twitter chat with Musk, people familiar with the move said.
Baby-Formula Makers Face FTC Investigation for Collusion
The Federal Trade Commission is investigating whether baby-formula makers colluded on bids for lucrative state contracts.
The agency, in documents posted to its website, said it is looking into whether Abbott Laboratories and other formula manufacturers have “engaged in collusion or coordination with any other market participant regarding the bidding” for state contracts.
PacWest Sells Real-Estate Lending Unit
PacWest Bancorp struck a deal to sell a real-estate lending arm, the latest move to shore up confidence in the struggling bank.
Roc360, a real-estate lending firm, will buy the bank’s Civic Financial Services unit, which specializes in lending money to landlords and investors who buy homes to fix them up for resale. Maksim Stavinsky, Roc360’s co-founder and president, said the deal closed Tuesday but didn’t provide terms.
Lenovo Fourth-Quarter Profit Fell 72% Amid Continued PC Weakness
Lenovo Group’s net profit fell 72% in its fourth quarter, as personal-computer sales continued to decline amid a deteriorating global economy and soft consumer spending.
Net profit for the three months ended March was $114 million, the world’s largest PC maker said Wednesday. That compared with profit of $412 million a year earlier.
Target to Pull Some LGBT-Themed Merchandise After Customer Backlash
Target said Tuesday it would remove some products related to Pride Month from stores after a backlash from customers caused employees to feel unsafe, becoming the latest company to get drawn into the U.S. culture wars.
The Minneapolis-based retailer for over a decade has sold a selection of often rainbow-adorned clothing, décor and other items related to Pride Month, the early summer celebration of the LGBT community. The company has always received some criticism for the collection, but this month the negative reaction has taken a more aggressive turn, particularly in recent days, a spokeswoman said.
New York Times Union Agrees to Contract After Two-Year Fight
The New York Times and its newsroom union agreed to a tentative collective bargaining contract after more than two years of negotiations that stoked tensions among members and led staffers to go on a one-day strike late last year.
The tentative agreement, which would be effective until March 2026, includes a salary floor of $65,000 and raises of at least 10.6% for all staff. It also includes a hybrid-work guarantee allowing most members to work remotely at least two days a week until September 2024 and at least one day a week until the end of the contract.
For Banks, Debt-Ceiling Drama Doesn’t End With a Deal
Even once the debt ceiling is resolved, there may be more plot twists for American companies-especially deposit-hungry banks.
Ending the standoff will enable the U.S. Treasury to raise cash to pay its bills. Normally that is a dull part of the financial system’s plumbing, but these aren’t normal times for many banks. And since the Treasury also must refill a huge hole that the multimonth drama has forced it to dig, the refunding process could add to the competition for the cash of savers and investors. That would exacerbate worries about banks’ funding.
Freeze or Cut? Spending Fight Is Main Event in Debt-Ceiling Talks
WASHINGTON-Reining in government spending has become the central focus of negotiations over raising the debt ceiling, with House Speaker Kevin McCarthy (R., Calif.) under pressure from conservatives to secure deep cuts, while Democrats have offered a spending freeze.
GOP negotiators have insisted that any deal with the White House must result in lower discretionary spending next year than this year, calling it a critical step in starting to address the country’s growing debt, which now stands at $31.4 trillion.
Share Buybacks Continue at Torrid Pace While Investors Sit on Sidelines
U.S. companies have remained stalwart buyers of their own shares even as institutional and individual investors alike have become skittish and trimmed their exposure to equities.
Companies in the Russell 3000 have unveiled plans to buy back more than $600 billion in shares this year, in line with last year’s record pace, according to data from research firm Birinyi Associates. In all, they announced $1.27 trillion of share repurchases and completed $1.05 trillion in buybacks in 2022, both all-time highs, according to Birinyi.
Bank Stocks Are Now Meme Stocks
This is the year that bank stocks became meme stocks.
Shares of banks such as PacWest have seesawed wildly since March. Bad news, including lost deposits, has sent them spiraling. Good news, like hints of greater government support, has sent them soaring.
UK Inflation Fell Less Than Expected in April as Core Prices Jumped
The U.K.’s inflation rate fell less than expected in April, propped up by soaring food prices, while the closely watched core rate unexpectedly rose, indicating that the Bank of England will likely choose to raise interest rates again as it tries to tackle persistently high prices.
Consumer prices increased 8.7% in April compared with the same month a year earlier, down from March’s 10.1% on-year rise, mainly due to on easing energy prices, data from the Office for National Statistics showed Wednesday.
German Business Sentiment Fell in May on Bleak Outlook for Manufacturing
Business sentiment in Germany fell in May for the first time in seven months, hampered by bleaker expectations among companies, especially in the country’s key manufacturing sector.
The Ifo business-climate index dipped to 91.7 in May from 93.4 in April, according to data from the Ifo Institute published Monday.
It Just Had an Energy Crisis, Now Europe Faces a Food Shock
LONDON-Fresh out of an energy crisis, Europeans are facing a food-price explosion that is changing diets and forcing consumers across the region to tighten their belts-literally.
This is happening even though inflation as a whole is falling thanks to lower energy prices, presenting a new policy challenge for governments that deployed billions in aid last year to keep businesses and households afloat through the worst energy crisis in decades.
U.S. and China See Fragile Opportunity to Repair Ties
After months of recrimination, U.S.-China relations are entering a new phase likely to determine whether the two powers are able to restore high-level exchanges derailed by a Chinese balloon earlier this year.
A first barometer of the chance for success is a dinner planned for Thursday in Washington, where Commerce Secretary Gina Raimondo will sit down with her Chinese counterpart, Wang Wentao. It will be the first cabinet-level meeting in Washington between the two countries during the Biden administration.
Debt-Ceiling Fight Sends Investors Hunting for New Havens
Traders worried about a potential U.S. default are swapping their go-to safe haven for the bonds of America’s top-rated companies.
Just days or weeks before the government faces a possible funding shortfall, investors are shunning U.S. Treasury bills that will mature over the next several months while paying a premium to buy debt issued by Microsoft and Johnson & Johnson, two of the highest-rated U.S. companies.
Hunter Biden Probe Tensions Mounted, IRS Agent Alleges
WASHINGTON-In a charged meeting last year, federal prosecutors were informed of investigators’ “longstanding concerns” about what they described as irregularities in the handling of the Justice Department’s criminal investigation into President Biden’s son, Hunter Biden, a lawyer for an IRS supervisory agent said in a letter.
The letter to the Office of Special Counsel, an independent investigative body that handles federal government personnel matters, refers to a meeting in October 2022 and comes days before the supervisory agent is set to give closed-door testimony on Capitol Hill.
Trump Hush-Money Case to Go to Trial in March 2024
A New York judge on Tuesday scheduled a March 25, 2024, trial date for former President Donald Trump on criminal charges related to his alleged role in paying hush money to a porn star.
The date, which the judge said wouldn’t be moved, means the case will be starting as Trump, who is running for the 2024 Republican presidential nomination, is in the middle of the GOP primary campaign.