In Portfolioticker today
Today at the stock market
“Wall Street pulled back from record highs on Monday, with the Dow and the S&P 500 indexes marking their biggest one-day percentage declines in about five months, weighed down by a slide in Apple shares. The S&P technology index fell 0.9% and was the biggest drag on the benchmark index following Wall Street’s strongest 4 week run since 2016.
It was a rocky start to an action-packed week, which will feature U.S. President Donald Trump’s first official State of the Union speech late Tuesday.
The Cboe Volatility Index (VIX), the most widely followed barometer of expected near-term volatility for U.S. stocks, closed up 2.76 points, or nearly 25%, at 13.84, its highest close since 18 Aug 2017. “We’ve had a long run in the stock market, and we’ve seen some unease, but that could be reversed with a couple of good days,” said Hellwig.
Benchmark U.S. 10-year Treasury note US10YT=RR yields hit their highest since 2014 due to economic strength, which added to pressure on defensive sectors such as utilities, real estate and telecoms.
Shares of Apple fell 2.1% on news that the company will halve production of its $999 iPhone X smartphone. The company is due to report earnings on Thursday.
“The market’s responding to the question of what Apple’s earnings are going to look like, specifically what kind of guidance are they going to give on iPhone X sales,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.
The week ahead
Ahead this week is the Federal Reserve’s meeting, the U.S. employment report and earnings from a host of high-profile names including Amazon.com, Alphabet and Facebook.
Fourth-quarter earnings growth for the S&P 500 is now seen at 13.2%, up from 12% at the beginning of the year, according to Thomson Reuters data. Of the companies that have reported, about 80% have beaten Wall Street expectations.
Aside from higher yields, telecom stocks also slipped on reports that the U.S. government was considering building a 5G wireless network to guard against spying.
AT&T was down 1.5%, Verizon slipped 1.1% and Sprint pulled back by 1.9%.
Dr Pepper Snapple Group jumped to an all-time high after K-cup maker Keurig Green Mountain said it will buy the company in a deal worth more than $21 billion. The stock ended up 22.4% at $117.07.” Reuters
^ Market indices today (mouseover for 12 month view) Chart: Google Finance
|Index||Ticker||Today||Change||31 Dec 17||YTD|
|S&P 500||SPX (INX)||2,853.53||-0.68%||2,673.61||+6.72%|
^ USD and AUD denominated indices over the past 52 weeks Chart: Bunting
|Index||Currency||Today||Change||31 Dec 17||YTD|
Portfolio stock prices
Amazon closed on a record high of $1,417.68, up 1.11% on Friday’s record $1,402.05.
Apple is down 6.30% on its 18 jan 2016 record $179.26.
VMware is down 16.63% on a report that majority owner Dell may use VMware to buy Dell as a means of returning itself to the open market without an IPO.
|Stock||Ticker||Today||Change||31 Dec 17||YTD|
^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for 12 month view) Chart: Bloomberg
“Today’s USD advance came after it capped a seventh week of losses on Friday, while the JPY weakened as the Bank of Japan downplayed Governor Haruhiko Kuroda’s comments on stronger inflation, and the British GBP declined as pressure built on Prime Minister Theresa May over Brexit.
The Bloomberg Dollar Spot Index (DXY) rose 0.3%, after posting the biggest increase in more than 6 weeks.
The EUR fell 0.4% to USD 1.2380, after seeing the largest drop in more than a week.
Britain’s GBP fell 0.6% to USD 1.4069.
Japan’s JPY fell 0.4% to 108.98” Bloomberg
^ AUD movements against the USD today (mouseover for 12 month view) Chart: xe.com
“The Australian dollar’s longest rally in 18 months is bringing out the bears.
The AUD is poised to go into reverse as the Federal Reserve keeps raising interest rates, while the Reserve Bank of Australia leaves borrowing costs at a record low, said James Athey at Aberdeen Standard Investments in London, who is adding to his short positions. Schroder Investment Management Australia Ltd., which is also short, said the AUD is likely to trade closer to USD 0.70 than USD 0.80 in 12 months.
The AUD has advanced for 7 straight weeks as the USD has slumped and rising prices for commodities such as iron ore have bolstered the outlook for Australia’s exports.
“For now, it is tough to fight,” said Athey, a senior investment manager at Aberdeen, which oversees about $810 billion. “But in the medium term, the Australian economy does not welcome a stronger Australian dollar. Plus, I expect commodity prices to moderate.”
Both Aberdeen and Schroder predict the RBA will probably leave its benchmark at 1.5% this year as debt-laden households struggle with stagnant wages and inflation at the lower end of the central bank’s 2% to 3% percent target. Swaps traders are betting policy makers will tighten in the second half of this year.
The AUD fell as much as 0.4% to USD 0.8079 cents on Monday. It’s paring back an advance last week that took it to USD 0.8136 on Friday, the strongest since May 2015.
“The move up toward 80 cents has largely been driven by U.S. dollar weakness rather than Aussie dollar strength,” said Simon Doyle, Sydney-based head of fixed income and multi-asset at Schroder, which oversees about $540 billion. “We don’t see that as being something which is sustainable.”
Options traders are the most bearish on the Aussie among developed-market currencies, 6-month risk reversals show. The premium investors paid for options giving the right to sell the AUD versus the USD, over those to buy, was about 48 basis points. Still, the gauge of bearishness has dropped from 165 basis points a year ago.
“The backdrop remains unproductive for sustained appreciation of the Australian dollar above 80 cents,” said Paresh Upadhyaya, a portfolio manager at Amundi Pioneer in Boston. “There are three key headwinds facing the Aussie battler: falling iron-ore prices, a gradual but discernible deceleration in Chinese growth and widening interest-rate differentials in favor of the U.S. dollar.”
The AUD has rallied over the past 2 months even as the nation’s yield premium has dwindled. The extra yield on the nation’s 10-year bonds over similar-maturity Treasuries has shrunk to 17 basis points from as much as 61 basis points in Sep 2017.
Eaton Vance Corp. remains bullish on the AUD as the nation’s economy is strong and will bolster expectations the RBA will hike, said Eric Stein, co-director of global fixed income in Boston.
“The exact level of the Aussie will depend a lot on what the broad U.S. dollar does from here,” Stein said. “But we will still like it here, as we do Aussie bonds.”
Data due Wednesday will probably show that consumer prices in Australia advanced 0.7% in Q4/2017, compared with a 0.6% increase in Q3/2017.
While hedge funds and other large speculators increased their Aussie long positions to 25,725 contracts in the week ended 23 Jan 2018, the net bullish position is down from 86,204 at the end of August, data from the Commodity Futures Trading Commission show.
It’s only a matter of time before the currency drops below 70 cents, according to Tony Bradley, a partner at hedge fund Hunter Burton Capital in Sydney.
“As the Fed hikes and U.S. rates overtake Australia’s, it will put pressure on the Aussie dollar, but the RBA doesn’t care. I am short and hope to be able to stay short for most of the year,” said Bradley.” Bloomberg
Oil and Gas Futures
Prices are as at 15:49 ET
- NYMEX West Texas Intermediate (WTI): $65.41/barrel -1.10% Chart
- ICE (London) Brent North Sea Crude: $69.34/barrel -1.67% Chart
- NYMEX Natural gas futures: $3.63/MMBTU +3.59% Chart
“Oil prices slipped 1.5% on Monday, pressured by a strengthening USD and rising U.S. crude output, but prices remained on track for the biggest January increase in five years.
Brent crude futures were down $1.05 at $69.45/barrel at 11:26 EST (1626 GMT). U.S. West Texas Intermediate (WTI) crude futures were $1 lower at $65.14/barrel.
Brent has risen 6.3% so far this month, headed for its biggest January rise since 2013.
“There seems to be a little profit-taking today because the stock market is weaker and longs keep adding to the long side of the equation,” said Phil Flynn, analyst at Price Futures Group in Chicago.
Oil prices have been buoyed by the USD 6 straight weekly slides. The USD is set to fall 3% for this month. Oil is priced in the U.S. currency, so a falling dollar can boost demand for crude from buyers using other currencies.
The dollar index had been below $90 since 24 Jan 2018. But the USD has rebounded nearly 0.5% since Friday to $89.59, which has weighed on crude prices.
“After six weeks of losses balance is inevitable. Its influence has really resurged as of late to where the dollar index (DXY) below $90 has propped up oil,” said John Kilduff, partner at Again Capital LLC in New York.
Crude prices also had drawn support from a large premium in the front-month Brent oil contract over those for future delivery, as investment in crude futures and options reached a new record high last week.
Oil consumption is surging as a result of growth in major economies, while OPEC and its allies have made repeated commitments to limiting their crude output.
On Monday, Iraq’s oil minister said in London that the oil market was improving, and that the country would comply with OPEC output cuts even though it is trying to increase its oil export capacity.
Somewhat offsetting the OPEC-led cuts has been rising oil output in North America.
“We believe that today’s oil prices project a too rosy picture,” said Julius Baer’s head of macro and commodity research Norbert Ruecker.
U.S. output has jumped more than 17% since mid-2016, reaching 9.88 million barrels per day (bpd) in mid-Jan 2018. It is expected to exceed 10 million bpd soon.
U.S. energy firms added 12 drilling rigs for new production in the week to 26 Jan 2018, taking the total to 759, Baker Hughes reported on Friday.
U.S. production is now on par with top exporter and OPEC kingpin Saudi Arabia. Only Russia produces more, averaging 10.98 million bpd in 2017.” Reuters
Dell May Sell Itself to VMware
Press Release Extract [vmw]
“Dell Technologies could emerge as a public company through a reverse-merger with VMware, the $60 billion cloud computing company it already controls, according to people familiar with the matter.
The reverse merger, whereby VMware would actually buy the larger Dell, would then allow Dell to be traded publicly without going through a formal listing. It would also likely be the biggest deal in tech industry history, giving investors who backed Dell’s move to go private in 2013 a way to monetize their deal, while helping Dell pay down some of its approximately $50 billion debt.
VMware’s stock fell sharply on the news. At midday, it was down 8.5%.
While Dell may also pursue a more traditional initial public offering, said the people, a reverse merger would allow the company to avoid a new public offering. Dell hasn’t decided on a strategic option and is also considering several other paths forward, including other acquisitions or buying the remaining stake of VMware it doesn’t own, as has been previously reported. Dell is unlikely to sell the company outright or sell its stake in VMware, one of the people said.
VMware was seen as the crown jewel in 2015 when Dell acquired EMC for $67 billion. That gave Dell 80% of VMware, which was an early pioneer in a technology called virtualization. That process gave companies a way to run the large computers in their data centers more efficiently by packing multiple “virtual” computers on a single piece of hardware.
While the technique is still widely used, VMware’s growth prospects have been tempered as companies have moved more of their infrastructure from their own data centers to large cloud providers like Amazon and Microsoft. In 2016, the company agreed to let customers run its software on arch-rival Amazon’s cloud service, an admission that the cloud model is taking precedence.
The reverse-merger is one of the more audacious strategic initiatives being looked at by Dell and its advisers, said the people, who asked not to be named because the discussions are private. Dell’s board of directors will meet next month to consider a slew of options, many of which are still in the early stages of examination, including the reverse merger.
If VMware were to buy Dell, VMware would issue shares to Michael Dell and Silver Lake, the private owners of Dell. The owners could then sell shares on the public market as a way of monetizing their investment in Dell, the people said.
The exact valuation of Dell isn’t known because the company is private. Dell took itself private in a $24.4 billion deal in 2013. It then acquired EMC for $67 billion in 2015, a deal that still stands as the largest technology acquisition of all time.
Theoretically, a VMware acquisition for Dell would top that, making it the largest technology deal ever. Dell acquired more than 80 percent of VMware when it completed its deal for EMC in 2016. VMware’s platform virtualization software was a key reason Dell pursued EMC two years ago.
While VMware’s revenue has consistently grown each year, that has slowed. Annual sales rose 6.7% in 2016 from 2015 after 6 consecutive years of double-digit percentage growth. Still, net income of $1.2 billion was an all-time high for the company for 2016, and 2017 full-year estimates suggest the company will top that mark.
Spokespeople for Dell and VMware declined to comment.” CNBC
US: Personal Income and Outlays, Dec 2017
Press Release Extract [us_pce]
Personal income increased $58.7 billion (0.4 percent) in December according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $48.0 billion (0.3 percent) and personal consumption expenditures (PCE) increased $54.2 billion (0.4 percent).
Real DPI increased 0.2 percent in December and Real PCE increased 0.3 percent. The PCE price index increased 0.1 percent. Excluding food and energy, the PCE price index increased 0.2 percent.
The increase in personal income in December primarily reflected increases in wages and salaries and personal interest income.
The $34.4 billion increase in real PCE in December reflected an increase of $11.1 billion in spending for goods and a $23.2 billion increase in spending for services. Within goods, new motor vehicles was the leading contributor to the increase. Within services, the largest contributor to the increase was spending for electricity and gas.
Personal outlays increased $61.5 billion in December. Personal saving was $351.6 billion in December and the personal saving rate, personal saving as a percentage of disposable personal income, was 2.4 percent.
2017 Personal Income and Outlays
Personal income increased 3.1 percent in 2017 (that is, from the 2016 annual level to the 2017 annual level), compared with an increase of 2.4 percent in 2016. DPI increased 2.9 percent in 2017 compared with an increase of 2.6 percent in 2016. In 2017, PCE increased 4.5 percent, compared with an increase of 4.0 percent in 2016.
Real DPI increased 1.2 percent in 2017, compared with an increase of 1.4 percent in 2016. Real PCE increased 2.7 percent, the same increase as in 2016.”
Bureau of Economic Analysis, “Personal Income and Outlays: December 2017“, 29 Jan 2018 (08:30) More
^ JPY movements against the USD over the past month (mouseover for inverse) Chart: xe.com
Stockmarket: Nikkei 225
^ Nikkei 225 movements over the past week Chart: Google Finance
^ CNY movements against the USD over the past month (mouseover for inverse) Chart: xe.com
^ Shanghai CSI300 movements over the past week Chart: Google Finance
“China’s stocks tumbled on Monday, with losses deepening in afternoon trade, as investors dumped high-flying large-cap shares.
The CSI 300 Index of the biggest companies sank 1.8% at the close, the steepest drop since 23 Nov 2017. Liquor distillers were among the biggest laggards, with market darling Kweichow Moutai Co. sliding 5.3%. Traders cited several reasons for the declines, including:
- Regulatory pressure: China’s securities regulator said in a 26 jan 2018 statement that it will do more to curb market manipulation, while the banking watchdog unveiled over the weekend new fines on lenders for misuse of funds
- Concern that China’s economic growth is slowing
- The approaching Lunar New Year holiday is encouraging some investors to lock in January profits — even after Monday’s slump, the CSI 300 is up 6.7% this month.
Big caps were the brightest spot in the onshore equity market last year, surging as their earnings outlook improved and investors chased stocks less affected by the nation’s deleveraging campaign. Still, it’s becoming a bumpier ride: 50-day volatility is now at the highest level since Aug 2016.
“Investors need to be wary of the risk that the rally in big caps may be coming to an end,” said Guo Feng, head of wealth management department at Northeast Securities Co. “Profit-taking pressures are mounting after strong gains, and China’s economic growth is expected to slow from last year.”
The Shanghai Composite Index declined 1% at the close after capping a 6th straight weekly increase, while the Shenzhen Composite Index lost 1.6%. Hong Kong’s benchmark Hang Seng Index slipped 0.6% after a 16% gain over 7 weeks. Sunny Optical Technology Group Co. and Country Garden Holdings Co., which have more than doubled in the past 12 months, led the index lower.
“The rally in both markets has been too fast,” said Linus Yip, Hong Kong-based strategist with First Shanghai Securities Ltd. “Investors are locking in profits in those with high valuations and piling into more attractive bets like Chinese banks.”
Chinese lenders were among the best performers in Hong Kong. Postal Savings Bank of China Co. climbed 5% and Industrial & Commercial Bank of China Ltd. rose 1.4%, with both closing at record highs.” Bloomberg