Tag Archives: debt

Business

BofA Struggles With Tepid Loan Income as Consumers Shun Debt

Leave a comment

(Bloomberg) — Bank of America Corp. is struggling to build back its lending income as consumers, flush with cash from government stimulus programs, avoid taking on new borrowings.

Loans and leases in the consumer banking unit fell 12% from a year earlier. Net interest income, on a fully taxable equivalent basis, was $10.3 billion last quarter, the bank said Wednesday. That metric — revenue from customer-loan payments minus what the company pays depositors — was less than analysts’ estimated $10.5 billion.

While government aid programs during the pandemic have helped big lenders like Bank of America dodge widespread defaults, they’ve also meant many consumers and businesses haven’t needed to take on new loans or tap lines of credit. That trend, along with rock-bottom interest rates meant to stimulate the economy, have weighed on the profitability of banks’ core lending businesses. While Bank of America’s loan balances remained down from a year earlier, they grew from the first quarter — the first sequential increase in a year.

“Net interest income and net interest margin both look light,” said Alison Williams, an analyst at Bloomberg Intelligence. “The improvement is likely not as much as hoped by some.”

Chief Executive Officer Brian Moynihan said Bank of America sees organic growth reemerging as vaccination campaigns make progress and the economy recovers.

“Companies need to build inventory and hire workers to meet the growing customer demand,” he said on a conference call with analysts. “This virtuous circle of hiring workers and meeting customer spending will help drive the economy and hopefully will result in more line usage.”

Banks’ Wall Street operations have helped pick up the slack as turbulent markets boosted trading volumes. Companies seeking to stockpile cash, meanwhile, turned to debt and equity financing, and a combination of cheap financing for buyers and attractive valuations for sellers spurred a wave of acquisitions.

Bank of America’s trading revenue fell 14% last quarter, while investment-banking fees fell 1.7%. Financial-advisory fees came in at $407 million in the second quarter, little changed from a year earlier. That contrasts with results at Goldman Sachs Group Inc., which saw an 83% surge in dealmaking fees, and JPMorgan Chase & Co., where that type of revenue climbed 52%.

Bank of America slid 1.3% to $39.35 at 9:32 a.m. in New York. The Charlotte, North Carolina-based company has advanced 30% this year, compared with a 27% gain for the KBW Bank Index.

Chief Financial Officer Paul Donofrio said the second-quarter marked “a turning point” for loan growth and that the bank expects lending to continue increasing as the year progresses. However, he stopped short of reiterating Bank of America’s forecast, provided in April, that net interest income, by the end of the year, would be about $1 billion higher than the $10.3 billion the bank posted in the first quarter.

“This was the quarter where you saw the evidence that we were all looking for that loans were going to start growing,” Donofrio said on a conference call with reporters Wednesday.

Donofrio added later on the analyst call that reaching the previous NII target was “possible” but that a recent significant decline in long-term interest rates “presents a challenge” to achieving that goal.

Bank of America continued to release reserves it built up earlier in the pandemic, anticipating a wave of loan losses that never materialized. The lender released $2.2 billion of reserves in the second quarter, following a $2.7 billion release in the first quarter.

Donofrio said that the bank’s credit losses are at a 25-year low and that he expects reserve levels to continue to decline, though probably not at the pace of previous quarters.

Also in the second-quarter results:

Noninterest expenses rose 12% to $15 billion.Net income more than doubled to $9.2 billion, or $1.03 a share. Analysts estimated 77 cents, on average.Total revenue dropped to $21.5 billion.

(Updates with CEO’s comments starting in fifth paragraph.)

More stories like this are available on bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2021 Bloomberg L.P.

Read original article here

Business

The cost of living posts biggest surge since 2008, U.S. CPI shows, as inflation spreads through economy

Leave a comment

The numbers: The cost of living leaped in June by the largest amount since 2008 as inflation spread more broadly through the U.S. economy, raising fresh questions about whether the spike in prices will subside as quickly as the Federal Reserve predicts.

The consumer price index climbed 0.9% last month, the government said Tuesday. The cost of used cars accounted for more than one-third of the increase, but prices for food, energy, clothing, plane tickets and hotels also rose sharply.

The increase easily exceeded forecasts. Economists polled by The Wall Street Journal had estimated a 0.5% advance.

The rate of inflation in the 12 months ended in June climbed to 5.4% from 5%. The last time prices rose that fast was in 2008, when oil hit a record $150 a barrel.

Another closely watched measure of inflation that omits volatile food and energy also rose 0.9% In June. The 12-month rate increased to 4.5% from 3.8% and stood at a 29-year high.

This core rate is closely followed by economists as a more accurate measure of underlying inflation.

Read: Higher U.S. inflation isn’t going away just yet. Here’s why

Big picture: The rapid recovery in the economy has had an unwanted side-affect: higher inflation.

Businesses can’t get enough supplies or labor to keep up with surging sales, forcing them to pay higher prices for almost everything. In turn, they are trying to pass those extra costs onto customers.

Read: Job openings hit record 9.2 million, but workers aren’t easy to find

The Federal Reserve has insisted for months that widespread shortages will fade away once the U.S. and global economies return to normal.

Ditto for inflation. The central bank has repeatedly referred to the sharp increase in prices as “transitory” and predicted inflation would taper off toward its 2% target by next year, using its preferred PCE price barometer.

Yet even the Fed admits it was caught off guard by how high inflation has risen. There’s a risk inflation could stay higher for longer than it expected, according to minutes of the Fed’s most recent strategy session.

Read: Fed admits inflation rose much higher than expected, but it still insists price increases are temporary

So far most investors have been unruffled, though the latest CPI is likely to stoke fresh worries.

Key details: The cost of used vehicles soared a record 10.5% in June following outsized gains of 7.3% in May and 10% in April. That category alone accounted for more than one-third of the increase in overall consumer prices last month.

These price increases won’t last long, however. Automakers are rushing to produce more new cars and trucks and eventually the market for used vehicles will revert to normal.

The cost of gasoline also rose 2.5% last month and was another big contributor to inflation. Gas prices are up 45% in the past year.

More worrisome was the largest increase in food prices since 2011, excluding the first few months of the pandemic. Higher food prices suggest some inflation is spreading more broadly through the economy.

Still, much of the increase in consumer prices last month was concentrated in goods and services whose prices fell sharply in the early stages of the coronavirus pandemic last year. Not just used vehicles, but airfares, hotels and restaurant menus.

These price increases are likely to subside soon, giving support to the Fed’s argument that the surge in inflation will prove temporary.

The cost of two other major consumer expenses, shelter and medical care, have also been rather tame. Rents have risen less than 2% in the past year and the cost of medical care has increased less than 1%.

What they are saying? “The spike in inflation still looks to be primarily Covid-related and temporary as outliers continue to drive much of the upward push in prices,” said Nationwide senior economist Ben Ayers. “But the effects of the recent jump could linger for consumers for some time with above-average costs extending into 2022.”

“Is the ‘transitory’ debate over?” asked senior economist Jennifer Lee of BMO Capital Markets. “The answer is no, the transitory debate is far from over. In fact, it got a little hotter.”

Market reaction: The Dow Jones Industrial Average
DJIA,
-0.20%
and S&P 500
SPX,
+0.03%
were fell slightly in Tuesday trades. The yield on the 10-year U.S. Treasury
TMUBMUSD10Y,
1.356%
note was little changed, however.

Read original article here

Business

Oracle Sells $15 Billion of Debt, Drawing Two Credit Rating Cuts

Leave a comment

Bloomberg

CP Rail Agrees to Buy Kansas City Southern for $25 Billion

(Bloomberg) — Canadian Pacific Railway Ltd. agreed to buy Kansas City Southern for $25 billion, seeking to create a 20,000-mile rail network linking the U.S., Mexico and Canada in the first year of those nations’ new trade alliance.The transaction creates the only network that cuts through all three North American countries, giving CP access to the Kansas City, Missouri-based company’s sprawling Midwestern rail network that connects farms in Kansas and Missouri to ports along the Gulf of Mexico. The network would also let CP reach deep into Mexico, which made up almost half of Kansas City Southern’s revenue last year.“I’ve had my eye on the KCS for quite some time,” CP Chief Executive Officer Keith Creel said in a telephone interview. “We extend our reach for our customers through the U.S. and into Mexico, and at the same time KCS can do the same coming from Mexico up to U.S. destinations and Canada.”The combination — the biggest purchase of a U.S. asset by a Canadian company since 2016 — would provide a transportation solution for manufacturers seeking to bring factories back to North America after the pandemic exposed risks of relying on overseas supply chains, Creel said. The merger has a “compelling and powerful environmental impact” by enticing more truck cargo to rail, which is about four times more fuel efficient, he said.Kansas City investors will receive 0.489 of a CP share and $90 in cash for each share they hold, valuing the stock at $275 apiece — 23% more than Friday’s record close, according to a statement from both companies on Sunday.Creel will be CEO of the new company, to be based in Calgary, and is expected to remain at the helm until at least early 2026, according to a separate statement. The new entity, to be called Canadian Pacific Kansas City, or CPKC, will have revenue of about $8.7 billion and almost 20,000 employees.Trade PlayThe transaction would be the biggest Canadian purchase of a U.S. asset since Enbridge agreed to buy Spectra Energy for about $28 billion five years ago, according to data compiled by Bloomberg. That deal closed in early 2017.The deal comes as trade across the three nations is expected to pick up under the Biden administration. Just days after his inauguration, U.S. President Joe Biden spoke with the leaders of Canada and Mexico, his first calls with foreign counterparts, where issues from trade to climate change were discussed.Mexico is a crucial supplier of vehicles, auto parts, electronics and food and a major customer of grain, fuel and consumer goods — ties that are likely to be strengthened by July’s passage of the U.S.-Mexico-Canada trade pact.Kansas City’s unique network linking Mexico’s largest industrial cities and ports to the U.S. Midwest would be positioned to benefit if the coronavirus pandemic and fraying ties between the U.S. and China prompt companies to move lower-wage manufacturing from Asia to North America.As part of the transaction, CP will issue 44.5 million new shares, to be financed with cash-on-hand and about $8.6 billion in debt. CP’s debt would jump to about $20 billion and leverage would increase to about four times earnings before interest, taxes, depreciation and amortization. Free cash flow of about $7 billion over a three-year period from the combined railroad would help CP whittle that down to 2.5 times.CP expects to boost adjusted diluted EPS in the first full year after completing the deal, and later generate double-digit accretion. The combination will result in about $780 million of efficiency gains over three years, with about three-fourths of that coming from profit increase.No Job CutsThere will be no workforce reductions, Creel said in the interview, and he predicted the merger will result in job gains as sales grow.CP will file the merger application with the U.S. Surface and Transportation Board on Monday and begin the process of creating a trust that will hold Kansas City Southern’s shares while approval is pending, Creel said. The companies expect a review by the STB to be completed by mid-2022On a conference call with analysts Sunday, Creel said there’s “minimal risk’’ that regulators will block the deal. There are no situations in which the merger will cause shippers to lose access to rail options, he said.“The Canadian Pacific-KC Southern combination has most of the hallmarks for regulatory approval,” said Lee Klaskow, analyst at Bloomberg Intelligence. “It will remain the smallest Class I railroad and the lack of overlap and the extension of the combined networks will not impede competition, in our view, and may result in improved fluidity.”He added that Kansas City Southern is exempt from the regulator’s “high-hurdle merger rules.”Still, there could be other obstacles. CP’s hostile attempt to acquire Norfolk Southern Corp. beginning in 2015 collapsed amid a hail of shipper criticism, including from United Parcel Service Inc., FedEx Corp. and even the U.S. Army, which uses the rails to transport military equipment. Creel called the deal “simple and pro-competition” because the two networks don’t overlap.“It provides a positive impact for all stakeholders, including the public interest,” Creel said. “Existing customers get to extend their length of haul and reach into new markets, as well as new customers that this network will naturally attract.”A Repeat TargetKansas City Southern, the smallest of the U.S.’s Class I freight railroads, has been a takeover target before.In September, Dow Jones reported that the company rejected a $20 billion offer from Blackstone Group Inc. and Global Infrastructure Partners. Rumors of Kansas City Southern as a takeover target have swirled for years, especially after Canadian National Railway completed the purchase of the Illinois Central Railroad in 1999 that gave it access to ports in the U.S. Gulf of Mexico.Creel and Kansas City Southern CEO Pat Ottensmeyer said they began talks on the merger late last year. The two companies, which has work together for years with railcar exchanges, decided the timing was right, especially after the revamped U.S.- Mexico-Canada trade deal that replaced NAFTA, Ottensmeyer said.“This is a combination that just makes tremendous sense given that lack of overlap and the opportunities such as USMCA present for the outlook for rail and the footprint that this company is going to have in terms of an unmatched North American network,” Ottensmeyer said in the telephone interview.BMO Capital Markets and Goldman Sachs are financial advisers for Canadian Pacific, while Bank of America and Morgan Stanley are advising Kansas City Southern.(Updates with Creel comment from conference call in 15th paragraph. An earlier version was corrected to say the free cash flow figure refers to a three-year period)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.

Read original article here

Business

Tech Shares Fall as Bond Yields Rise

Leave a comment

U.S. stocks fell Thursday as shares of technology companies and other high-growth stocks succumbed to another selloff in the government bond market.

Investors appeared to rethink the implications of improving growth projections, pulling the stock market into the red a day after the S&P 500 closed at a fresh record and the Dow Jones Industrial Averaged finished above 33,000 for the first time.

They initially cheered comments from Federal Reserve Chairman

Jerome Powell

who reiterated the central bank’s commitment to supporting financial markets until the economy fully recovers.

But the Fed also increased its median projections for growth and inflation based on the latest round of stimulus doled out by Congress, leading investors to re-evaluate the broader implications that level of expansion will have on pockets of the market, analysts and money managers said. That sparked another round of selling of government bonds, pushing yields to their highest level in 14 months.

“This morning, the markets woke up and decided if the Fed is going to keep policy so loose, they want higher risk premium,” said Michael Matthews, a fixed-income fund manager at Invesco.

Stock futures had started heading lower overnight after the 10-year Treasury yield, a key benchmark for lending costs, breached 1.7% for the first time since January 2020.

The S&P 500 was recently down 0.5%, while the tech-heavy Nasdaq Composite slid 1.5%. The Dow Jones Industrial Average held up better, rising about 50 points to stay above 33,000.

Apple,

Amazon.com

and Google parent Alphabet all fell at least 1%. Electric car maker Tesla fell further, shedding more than 3%.

The higher yields mean borrowing costs for businesses and individuals will go up, so investors have been selling pricey tech stocks that look less valuable in a rising rate environment to load up on shares of companies poised to benefit from an economic rebound.

“It is all about inflation expectations: The fact that we are getting inflation expectations beyond the Fed’s target is spooking bond markets,” added Edward Park, chief investment officer at Brooks Macdonald.

Investors also contended with mixed economic data, suggesting that the economic recovery remains uneven.

The number of Americans applying for first-time unemployment benefits rose to 770,000 in the week ended March 13, from 725,000 in the week prior. While filings for jobless claims, a proxy for layoffs, has fallen from its peak last year, they remain at historically high levels.

Meanwhile, a manufacturing index from the Philadelphia Federal Reserve hit its highest level in more than three decades, suggesting activity continues to expand.

“The thing to watch is the employment numbers, and central banks are all watching that,” said Mr. Matthews. “The Fed and all central banks have decided it is better to run the economy hot, to aid the recovery, to get as low unemployment as they possibly can.”

On Thursday, investors looked to sectors like banks, airlines and energy companies, which could benefit more when social and business activity picks up. Shares of financial stocks in the S&P 500 rose 1.7%, as investors priced in the likelihood that banks could earn more on the loans they issue. Industrial companies also advanced, adding 0.8% in recent trading.

Tech stocks, meanwhile, slumped 1.7%, while the communication and consumer discretionary sectors fell around 1% each. Energy stocks, consumer staples, utilities and real-estate companies also fell.

Looking ahead, bond investors are betting that the Fed will raise interest rates within the next two years, despite data Wednesday that showed most policy makers still expect to maintain ultralow interest rates through 2023. Seven of 18 Fed officials anticipated lifting rates in 2022 or 2023, up from five in December.

Overseas, the pan-continental Stoxx Europe 600 ticked up 0.2%.

In Asia, most major benchmarks closed higher. China’s Shanghai Composite Index added 0.5%, while Hong Kong’s Hang Seng rallied 1.3%. Australia’s S&P/ASX 200 declined 0.7%.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Michael Wursthorn at Michael.Wursthorn@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here

Business

Here’s how far the Nasdaq could fall if bond yields reach 2%

Leave a comment

In early Friday action, the yield on the 10-year Treasury was rising and Nasdaq 100 futures were falling.

That’s been the pattern over the last month. After a very close connection since the pandemic began, inflation-adjusted yields have kept climbing, but the Nasdaq 100 has suffered. That makes sense given the rich valuation tech stocks enjoy — when safe bonds offer more than crumbs as return, they present an investment alternative to stocks.

So analysts are now modelling just how far techs could fall if bond yields keep rising. Joe Kalish, chief global macro strategist at Ned Davis Research, says the Nasdaq 100 could fall 20% from its peak if the 10-year Treasury reaches 2%. (The index is already down 6% from its peak.)

Kalish’s calculation depends on other relationships holding steady. He says earnings yields and forecasted corporate bond yields have moved in tandem since 2014. A 2% 10-year Treasury would likely cause the bond yields on Baa-related bonds — the lowest investment-grade rating — to reach 4.5%, requiring a 20% drop in the Nasdaq 100 to keep that relationship consistent.

Strategists at French bank Societe Generale tend to agree. They’ve looked at the theoretical impact of a rise in bond yields, at different price-to-equity ratios. Given that the Nasdaq Composite is trading on 31.5 times earnings, according to FactSet data, the chart shows the impact could be steep.

That said, most notable is that Kalish remains bullish on stocks even with those risks. He looked at another measure of valuation, using Census Bureau data on cash-flow margins. “As cash flow has improved since the early 1990s and the cost of capital has fallen with interest rates, the economic margin has risen,” he writes. Right now, that margin is above its 5-year average. In the U.S., the firm is recommending small caps over large caps and value over growth.

The buzz

The $1,400 stimulus checks from the $1.9 trillion relief package signed into law by President Joe Biden could arrive as early as this weekend. Biden set a May 1 target for all adults to be eligible to receive vaccines.

Novavax
NVAX,
+8.77%
will be in the spotlight after the biotech said a completed late-stage clinical study showed that its vaccine candidate was 96.4% effective against “mild, moderate, and severe disease caused by the original COVID-19 strain.” Thailand delayed the rollout of the AstraZeneca
AZN,
-2.29%
vaccine, joining Scandinavian countries including Denmark, over blood clot concerns. Italy reportedly will impose a lockdown over the Easter weekend, according to wire service reports citing a draft decree.

China is planning ways to tame e-commerce giant Alibaba
BABA,
+2.77%,
according to The Wall Street Journal. China also fined 12 tech companies including Baidu
BIDU,
+6.76%
and Tencent
700,
-4.41%
for alleged antitrust violations.

Electronic signature company DocuSign
DOCU,
+5.90%
topped revenue and earnings expectations for its latest quarter and delivered a better-than-expected outlook on those metrics.

Producer price and consumer sentiment data highlight the economics calendar.

The markets

The yield on the 10-year Treasury
TMUBMUSD10Y,
1.594%
rose as high as 1.61% — surprising analysts given the successful auction of bonds of that maturity earlier in the week.

Stock futures
ES00,
-0.29%,
particularly on the Nasdaq 100
NQ00,
-1.30%,
slumped. Gold futures
GC00,
-1.12%
fell by around $20 per ounce.

Random reads

There’s a bull market in twins — with the birth rate up by a third since the 1980s.

Scientists want to send 6.7 million sperm samples to the Moon as a global insurance policy.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Want more for the day ahead? Sign up for The Barron’s Daily, a morning briefing for investors, including exclusive commentary from Barron’s and MarketWatch writers.

Read original article here

Business

Stock Futures Rise, Pointing to Tech’s Rebound

Leave a comment

U.S. stock futures rallied Tuesday as a recent selloff in government bonds paused and giant technology stocks recovered some ground.

Futures tied to the S&P 500 gained 0.8%, suggesting that the broad market benchmark may climb after the New York opening bell. Dow Jones Industrial Average futures edged 0.5% higher. The blue-chips index notched a new intraday record on Monday.

Futures linked to the Nasdaq-100 rallied 2% Tuesday, indicating that technology shares are likely to rebound. The tech-heavy index and the broader Nasdaq Composite Index both fell into correction territory Monday, meaning that the gauges have declined more than 10% from recent highs.

Technology shares have come under pressure in recent weeks as a wave of selling in the bond market lifted Treasury yields. That led investors to question the high valuations that the technology sector is trading at following its steep climb in 2020.

The yield on the 10-year Treasurys ticked lower to 1.530% on Tuesday. It had ended the previous day at 1.594%, the highest level in over a year.

The stabilization in bond markets is likely to help technology shares recoup some of their losses, investors said. Money managers expect many companies in the sector to continue to benefit from increased online shopping and at-home access to media, entertainment and computing options even as Covid-19 lockdowns ease.

“It is this buy-the-dip mentality,” said Daniel Morris, chief market strategist at BNP Paribas Asset Management. “It’s not like we’ve changed our long-term view on tech. Everyone expects it to do well—it was just really expensive.”

U.S. lawmakers are on track to pass the latest version of the $1.9 trillion coronavirus stimulus package later this week. That has boosted investors’ confidence in the economy’s prospects and bolstered demand for stocks in companies that are likely to benefit from the economic rebound, such as banks and energy producers.

This rotation sent the Dow—which is weighted more heavily toward cyclical sectors—to notch its second highest close in history Monday.

Ahead of the market open, shares in

GameStop

gained more than 10%. The stock is climbing for a second day after the board tapped Chewy co-founder

Ryan Cohen

to lead a committee dedicated to transforming the retailer.

Some investors now expect that bond markets could calm as appetite for U.S. government debt revives following the sharp rise in yields. The 10-year Treasury yield was as low as 0.915% near the start of the year.

“We think a big part of the bond-yield move has played out,” said Hani Redha, a portfolio manager at PineBridge Investments. “At this level of yields, we do expect additional buyers to come in. That tends to stabilize the yield level.”

Overseas, the pan-continental Stoxx Europe 600 ticked up 0.6%.

The oil and gas sector in Europe climbed 1.6% as Brent-crude futures, the international gauge for oil prices, rose 1% to $68.92 a barrel.

In Asia, most major indexes were mixed by the close of trading. The Shanghai Composite dropped 1.8% and South Korea’s Kospi declined 0.7%. Japan’s Nikkei 225 advanced 1%.

The New York Stock Exchange on Monday.



Photo:

Lev Radin/Zuma Press

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here

Business

Tech Stocks Poised to Decline as Bond Yields Rise

Leave a comment

U.S. stock futures dropped Monday and a selloff in U.S. government bonds extended into its sixth week after progress toward a new fiscal stimulus bill brightened economic prospects and sapped demand for technology stocks.

Futures linked to the S&P 500 slipped 0.6%, suggesting that the broad market may decline after the opening bell. The benchmark ended Friday up 0.8% for the week, following a volatile week in which investors rotated out of big technology stocks. Nasdaq-100 futures fell 1.5% at the start of the new week, pointing to tech stocks extending losses.

In the bond market, the yield on benchmark 10-year US. Treasurys ticked up to 1.592% as investors moved funds out of assets considered to be the safest in the world. Yields rise when bond prices fall. It had ended Friday at 1.551%, its highest since February 2020.

President Biden’s $1.9 trillion Covid-19 relief plan was approved in the Senate over the weekend, and faces a vote in the House as early as Tuesday. The additional fiscal spending is expected to bolster the pace of economic recovery and boost inflation. As the outlook brightens, money managers are moving out of government bonds and technology stocks, and into sectors such as banks and energy that are likely to rebound with the economy.

“Stimulus checks into people’s bank accounts will be a big propeller of growth, given the consumer in the U.S. makes up such a big part of U.S. growth,” said Shaniel Ramjee, a multiasset fund manager at Pictet Asset Management. “The underlying strength of the U.S. economy, growing expectations that the stimulus gets fully passed, plus inflation expectations rising because of oil: these are all likely to continue to push bond yields higher.”

Tech stocks have been retreating in recent weeks as vaccination programs advance and economic data point to the recovery being under way. The Nasdaq Composite Index declined over 2% last week, losing ground for a third consecutive week. That is because investors are betting that the largest media, communications and online-shopping companies will see a slower pace of growth as pandemic lockdowns end.

Traders worked on the floor of the New York Stock Exchange on Friday.



Photo:

Nicole Pereira/Associated Press

Ahead of the market open, giant tech stocks including Apple, Microsoft, Amazon.com, Alphabet and

Facebook

fell in early trading. Apple, the biggest company on the S&P 500 by market value, has dropped over 8% this year. Shares in Tesla, the electric-vehicle maker that was also a favorite among individual investors last year, fell over 3% premarket. It has lost more than 15% so far in 2021.

“The main market element is what’s happening in the yield market: The U.S. tech side is suffering from the current normalization in the cost of capital,” said Samy Chaar, chief economist at Lombard Odier. “The market is currently acknowledging that we’re in a recovery. Flows are rebalancing to better reflect this cyclical recovery.”

Among other stocks moving in premarket trading,

General Electric

rose 3.2%. The Wall Street Journal reported that the industrial conglomerate was nearing a $30 billion deal to combine its aircraft-leasing business with Ireland’s

AerCap.

Some tech stocks edged down, including Tesla, which slipped 4%, and Square which fell nearly 3%.

Overseas, the pan-continental Stoxx Europe 600 rose 0.6%, led by banking stocks. Europe’s stock market is benefiting from investors rotating into value stocks, analysts said.

Among individual stocks, ABN Amro climbed over 7%,

Banco de Sabadell

rose more than 5% and

Deutsche Bank

gained over 4%.

In Asia, most major benchmarks fell by the close of trading. The Shanghai Composite fell 2.3% and Hong Kong’s Hang Seng Index declined 1.9% as investors grappled with signs that Chinese policy makers will take more action to rein in debt and prevent asset bubbles from forming.

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here

World

Senate COVID relief bill paves way for student debt forgiveness through executive action

Leave a comment

The New York Times

After Stimulus Victory in Senate, Reality Sinks in: Bipartisanship Is Dead

WASHINGTON — President Joe Biden ran for the White House as an apostle of bipartisanship, but the bitter fight over the $1.9 trillion pandemic measure that squeaked through the Senate Saturday made clear that the differences between the two warring parties were too wide to be bridged by Biden’s good intentions. Not a single Republican in Congress voted for the rescue package now headed for final approval in the House and a signature from Biden, as they angrily denounced the legislation and the way in which it was assembled. Other marquee Democratic measures to protect and expand voting rights, tackle police bias and misconduct and more are also drawing scant to zero Republican backing. Sign up for The Morning newsletter from the New York Times The supposed honeymoon period of a new president would typically provide a moment for lawmakers to come together, particularly as the nation enters its second year of a crushing health and economic crisis. Instead, the tense showdown over the stimulus legislation showed that lawmakers were pulling apart, and poised for more ugly clashes ahead. Biden, a six-term veteran of the Senate, had trumpeted his deep Capitol Hill experience as one of his top selling points, telling voters that he was the singular man able to unite the fractious Congress and even come to terms with his old bargaining partner, Sen. Mitch McConnell, R-Ky., the minority leader. But congressional Democrats, highly familiar with McConnell’s tactics, held no such illusions. Now, they worry that voters would punish them more harshly in the 2022 midterm elections for failing to take advantage of their power to enact sweeping policy changes than for failing to work with Republicans and strike bipartisan deals. Congressional Democrats want far more than Republicans are willing to accept. Anticipating the Republican recalcitrance to come, Democrats are increasingly coalescing around the idea of weakening or destroying the filibuster to deny Republicans their best weapon for thwarting the Democratic agenda. Democrats believe their control of the House, Senate and White House entitles them to push for all they can get, not settle for less out of a sense of obligation to an outdated concept of bipartisanship that does not reflect the reality of today’s polarized politics. “Looking at the behavior of the Republican Party here in Washington, it’s fair to conclude that it is going to be very difficult, particularly the way leadership has positioned itself, to get meaningful cooperation from that side of the aisle on things that matter,” said Rep. John Sarbanes, D-Md. But the internal Democratic disagreement that stalled passage of the stimulus bill for hours late into Friday night illustrated both the precariousness of the thinnest possible Democratic majority and the hurdles to eliminating the filibuster, a step that can happen only if moderates now deeply opposed agree to do so. It also showed that, even if the 60-vote threshold to break a filibuster were wiped away, there would be no guarantee that Democrats could push their priorities through the 50-50 Senate, since one breakaway member can bring down an entire bill. Republicans accused Democrats of abandoning any pretext of bipartisanship to advance a far-left agenda and jam through a liberal wish list disguised as a coronavirus rescue bill, stuffed with hundreds of billions of extraneous dollars as the pandemic is beginning to ebb. They noted that when they were in charge of the Senate and President Donald Trump was in office, they were able to deliver a series of costly coronavirus relief bills negotiated between the two parties. “It is really unfortunate that at a time when a president who came into office suggesting that he wanted to work with Republicans and create solutions in a bipartisan way and try to bring the country together and unify, the first the thing out of the gate is a piece of legislation that simply is done with one-party rule,” said Sen. John Thune of South Dakota, the No. 2 Republican. At their private lunch recently, Republican senators were handed a card emblazoned with a quotation from Ron Klain, the White House chief of staff, calling the coronavirus bill the “most progressive domestic legislation in a generation,” a phrase that party strategists quickly began featuring in a video taking aim at the stimulus measure. The comment was a point of pride for liberal Democrats, but probably not the best argument to win over Republicans. “I don’t understand the approach the White House has taken. I really don’t,” said Sen. Susan Collins of Maine, a leader of a group of 10 Republicans who had initially tried to strike a deal with the White House but offered about one-third of what Biden proposed. “There is a compromise to be had here.” Yet even as Biden hosted Republicans at the White House and engaged them in a series of discussions that were much more amiable than any during the Trump era, neither he nor Democratic congressional leaders made a real effort to find a middle ground, having concluded early on that Republicans were far too reluctant to spend what was needed to tackle the crisis. Democrats worried that if they did not move quickly, negotiations would drag on only to collapse and leave them with nothing to show for their efforts to get control over the pandemic and bolster the economic recovery. They wanted to go big and not wait. “We are not — we are not — going to be timid in the face of big challenges,” said Sen. Chuck Schumer, D-N.Y., the majority leader. “We are not going to delay when urgent action is called for.” While McConnell lost legislatively, he did manage to hold Republicans together when there was an appetite among some to cut a deal. He learned in 2009, when President Barack Obama took office at the start of the Great Recession, that by keeping his Republican forces united against Democrats, he could undermine a popular new Democratic president and paint any legislative victories as tainted by partisanship, scoring political points before the next election. The same playbook seems to be open for 2021. As they maneuvered the relief measure through Congress using special budget procedures that protected it from a filibuster, Democrats were also resurrecting several major policy proposals from the last session that went nowhere in the Republican-controlled Senate. Foremost among them was a sweeping voting rights measure intended to offset efforts by Republicans in states across the country to impose new voting requirements and a policing bill that seeks to ban tactics blamed in unnecessary deaths. House Republicans opposed both en masse and the outlook for winning the minimum 10 required Republican votes in the Senate is bleak. In the coming weeks, House Democrats plan to pass more uncompromising bills, including measures to strengthen gun safety and protect union rights — two pursuits abhorred by Republicans. Democrats fully recognize the measures will run into a Republican stone wall, but that is the point. In getting Republicans on the record against what Democrats see as broadly popular measures, they are hoping to drive home the idea that, despite their party’s control of Congress and the White House, they cannot move forward on the major issues of the moment with the filibuster in place. They want voters to respond. “We can’t magically make the Republicans be for what the people are for,” said Rep. Steny Hoyer of Maryland, the No. 2 Democrat. “The people are overwhelmingly for the agenda we are passing, and democracy works, so if the people want these bills to pass, they will either demand that we do away with the filibuster or demand that some Republican senators who refuse to do what the people want leave office.” Frustrated at their inability to halt the pandemic measure, Republicans lashed out at Democrats and the president. “They are doing it because they can,” said Sen. Lindsey Graham of South Carolina, the top Republican on the Budget Committee, who said Biden’s pledges on fostering unity now rang hollow. “This is an opportunity to spend money on things not related to COVID because they have the power do so.” Democrats would agree — they are using their substantial leverage to reach far beyond what Republicans can support, and say they are justified in doing so. “Let’s face it,” Schumer said on the Senate floor. “We need to get this done. It would be so much better if we could in a bipartisan way, but we need to get it done.” This article originally appeared in The New York Times. © 2021 The New York Times Company

Read original article here

Business

As rising Treasury yields spook stock investors, March looms like a lion

Leave a comment

After a frenetic February, investors are probably hoping that March holds true to its proverb: In like a lion out like a lamb.

Indeed, February turned out to be a doozy, with benchmark bond yields, represented by the 10-year Treasury note
TMUBMUSD10Y,
1.415%
and the 30-year long bond
TMUBMUSD10Y,
1.415%,
ringing up their biggest monthly surges since 2016, according to Dow Jones Market Data.

The move was a stark reminder to investors that bonds, considered mundane and straight-laced by some investors, can wreak havoc on the market all the same.

A final flurry of trading, some $2.5 billion in sales near Friday’s close, created a major downside drag for stocks in the final few minutes of the session and may imply that there may be more air pockets ahead before the market steadies next week.

The Dow Jones Industrial Average
DJIA,
-1.50%
and S&P 500 index
SPX,
-0.48%
barely held above their 50-day moving averages, at 30,863.07 and 3,808.40, respectively, at Friday’s close.

‘An associated 10-20% sell-off in US equities would also focus minds. But before then, the pain currently being handed out to growth-tilted equity portfolios could get worse.’ Citigroup strategists

“The turmoil is probably not over,” wrote Independent market analyst Stephen Todd, who runs Todd Market Forecast, in a daily note.

Yet, for all the bellyaching about yields running hotter than expected, stocks in February still managed to bang out solid returns. For the month, the Dow finished up 3.2%, the S&P 500 notched a 2.6% gain in February, while the Nasdaq eked out a 0.9% return, despite a 4.9% weekly loss put in on Friday that marked the worst weekly skid since Oct.30.

Many have made the case that a selloff in the technology-heavy Nasdaq Composite was inevitable, especially with buzzy stocks like Tesla Inc.
TSLA,
-0.99%
only getting frothier by some measures.

“But the market has been overbought and extended all year and arguably for several months in late-2020,” wrote Jeff Hirsch, editor of the Stock Trader’s Almanac, in a note dated Thursday.

“After the big run-up in the first half of February folks have been looking for an excuse to take profits,” he wrote, describing February as the weak link in what’s usually the best six-month period of gains for the stock market.

The beneficiaries of the recent move in yields so far appear to be banks, which are benefitting from a steeper yield curve as long dated Treasury yields rise, and the S&P 500 financials sector
SP500.40,
-1.97%

XLF,
-1.91%
finished down 0.4%, which is, as it turns out, was the second-best weekly performance of the index’s 11 sectors behind energy
SP500.10,
-2.30%,
which surged 4.3%.

Utilities
SP500.55,
-1.86%
were the worst performer, down 5.1% on the week and consumer discretionary
SP500.25,
+0.58%
was second-worst, off 4.9%.

In February, energy logged a 21.5% gain as crude oil prices rose, while financials rose 11.4% on the month, booking the best and second-best monthly performances.

So what’s in store for March?

“Typical March trading comes in like a lion and out like a lamb with strength during the first few trading days followed by choppy to lower trading until mid-month when the market tends to rebound higher,” Hirsch writes.

March also sees “triple witching: occur on the third Friday, when stock options, stock-index futures and stock-index option contracts expire simultaneously.

Ultimately, seasonal trends suggest that March will be wobbly and could be used as an excuse for further selling, but on that downturn may be cathartic and give way to further gains in the spring.

“Further consolidation is likely in March, but we expect the market to find support shortly and subsequently challenge the recent highs again,” writes Hirsch, noting that April is statistically the best month of the year.


Stock Trader’s Almanac

Looking beyond seasonal trends, it isn’t certain how the rise in bond yields will play out and ultimately ripple through markets.

On Friday, the benchmark 10-year note closed at a yield of 1.459% based on 3 p.m. Eastern close, and hit an intraday peak at 1.558%, according to FactSet data. The dividend yield for S&P 500 companies in aggregate was at 1.5%, by comparison, while the Dow it is 2% and for the Nasdaq Composite is 0.7%.

As to the question of to what degree rising yields will pose a problem for equities, strategists at Citigroup make the case that yields are likely to continue to rise but the advance will be checked by the Federal Reserve at some point.

“It is unlikely that the Fed will let US real yields rise much above 0%, given high levels of public and private sector leverage,” analysts on Citi’s global strategy team wrote in a note dated Friday titled “Rising Real Yields: What to do.”

Real adjusted yields are typically associated with rates on Treasury inflation-protected securities, or TIPS, which compensate investors based on expectations for inflation.

Real yields have been running negative, which have been arguably encouraging risk taking but the coronavirus vaccine rollouts, with a Food and Drug Administration panel on Friday recommending approval for Johnson & Johnson’s
JNJ,
-2.64%
one-jab vaccine and the prospects for further COVID aid from Congress, are raising the outlook for inflation.

Citi notes that the 10 year TIPS yields dropped below minus 1% as the Fed’s quantitative easing last year was kicked off to help ease stresses in financial markets created by the pandemic, but in the past few weeks the strategists note that TIPs had climbed to minus 0.6%.

Read: Here’s what one hedge fund trader says happened in Thursday’s bond-market tantrum, which sent the 10-year Treasury yield to 1.60%

Citi speculates that the Fed might not intervene to stem disruptions in the market until investors see more pain, with the 10-year potentially hitting 2% before alarm bells ring, which would bring real yields closer to 0%.

“An associated 10-20% sell-off in US equities would also focus minds. But before then, the pain currently being handed out to Growth-tilted equity portfolios could get worse,” the Citi analysts write.

Check out: Cracks in this multidecade relationship between stocks and bonds could roil Wall Street

Yikes!

The analysts don’t appear to be adopting a bearish posture per se but they do warn that a return to yields that are closer to the historically normal might be painful for investors heavily invested in growth stock names compared against assets, including energy and financials, that are considered value investments.

Meanwhile, markets will be looking for more clarity on the health of the labor market this coming Friday when nonfarm payrolls data for February are released. One big question about that key gauge of the health of U.S. employment, beyond how the market will react to good news in the face of rising yields, is the impact the colder than normal February weather have on the data.

In addition to jobs data, investors will be watching this week for manufacturing reports for February from the Institute for Supply Management and construction spending on Monday. Services sector data for the month are due on Wednesday, along with a private-sector payroll report from Automatic Data Processing.

Read: Current bond-market selloff worse than ‘taper tantrum’ in one key way, argues analyst

Also read: 3 reasons the rise in bond yields is gaining steam and rattling the stock market

Read original article here

Business

Global Markets Fall After Bond Yields Surge

Leave a comment

International stocks dropped Friday, tracking declines in U.S. indexes, as a selloff in bonds helped dent investor appetite for richly valued shares.

However, U.S. Treasury notes rose in price, regaining some of the previous session’s losses, and futures suggested stocks in New York could stabilize or gain slightly in Friday trading.

Investors said the market had been reassessing prospects for interest-rate increases by the U.S. Federal Reserve, despite assurances from Chairman

Jerome Powell

that the central bank won’t raise rates anytime soon.

“What has happened in recent weeks is the markets have had to reprice expectations of the Federal Reserve’s rate hikes,” said Dwyfor Evans, head of macro strategy for the Asia-Pacific region at State Street Global Markets in Hong Kong.

He said the pickup in bond yields would have knock-on effects on areas such as corporate lending and mortgage rates. “That’s why equities will come under pressure here, because rising yields will have some impact on the real [economy] and earnings might have to slow,” Mr. Evans said.

By early afternoon Friday in Hong Kong, major benchmarks there and in Japan had fallen more than 2%, as had China’s CSI 300 Index, which includes large stocks listed in either Shanghai or Shenzhen. South Korea’s Kospi Composite fell more than 3%.

In Asia, as in the U.S., some of the biggest declines came in highflying technology shares.

SoftBank Group,

Samsung Electronics

and

Taiwan Semiconductor Manufacturing Co.

all dropped more than 3%, while Chinese food-delivery giant Meituan tumbled 5.9%.

Higher bond yields suggest the U.S. economy is returning to normal, which should bode well for corporate earnings. But they also improve the relative appeal of bonds compared to stocks, and can cause investors to reassess how much they should pay now for expected future profits—a particular problem for fast-growing tech stocks.

“Given the market has already rallied over the past 10 months, you are seeing quite a bit of profit-taking,” said Ken Wong, a portfolio manager at Eastspring Investments. Mr. Wong said rising borrowing costs were already causing some market participants to unwind positions bought using leverage, while expensive valuations were also fueling caution.

As of Thursday, the MSCI AC World index traded at a price of 20 times expected earnings, according to Refinitiv data, a 37% premium to the average of the last 10 years.

On Thursday, the S&P 500 retreated 2.4% and the Nasdaq dropped 3.5%, as the yield on the 10-year Treasury note rose to a one-year high above 1.5%. Bond yields move inversely to prices.

But futures suggested the stocks selloff might not extend much further in U.S. markets Friday, with those on the S&P 500 declining 0.1% and Nasdaq-100 futures down 0.5%.

In Asian trading, the yield on the 10-year Treasury declined 0.017 percentage point to 1.498%, according to Tradeweb.

Some regional bond markets followed Thursday’s U.S. selloff, with Australian benchmark yields rising to 1.87%, the highest since 2019.

In Japan, 10-year yields also hit a multiyear high, at 0.16%. Since 2016, the Bank of Japan has kept 10-year rates at around zero under its yield-curve control policy, though in recent years it has permitted rates to overshoot or undershoot by as much as 0.2 percentage points.

Write to Xie Yu at Yu.Xie@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here