Something for everyone. Stocks rose for a third straight day as investors rejoiced trade concessions made from both sides. The European Central Bank gave a boost to global equities with a new stimulus package.
MY TWO CENTS
- The beat goes on. Yesterday’s market drivers were a continuation of all things that have lifted stocks in recent weeks. Tensions have appeared to cool between US and Chinese trade negotiators. On Wednesday night President Trump tweeted that he would temporarily hold off on raising the additional +5% tariff on $250 billion of Chinese goods scheduled to kick in on October 1. This after China announced some exemptions on their recently launched retaliatory tariff, which conspicuously did not include some sensitive agricultural products. China apparently fixed that last night WHILE YOU SLEPT, as the Chinese press announced that Soybeans and Pork would be added to the list of exemptions. Just in time because the Soybean Export Council reported that China purchased 15 cargo loads of the commodity yesteday. I would say that both sides look like they are playing nice ahead of their upcoming meeting, which is a good sign. President Trump also announced yesterday that he would consider an interimdeal with the Chinese leaving many concerned that a partial deal would lack enough benefit to justify the pain experienced by both sides leading up to the deal. In the Eurozone, The ECB announced a new stimulus package which included a -10 basis point cut to a key bank rate along with a resumption of bond buying. ECB Head Maria Draghi hopes that the quantitative easing combined with lower rates would free up money and spur investment along with inflation. Though largely expected, the rate cut to an already negative interest rate leaves many wondering how banks would be further incentivized to lend money. Draghi has plans for that too. The package also included a program to exempt certain loans from the now -50 basis point rate. Remember, lenders have to pay negative interest rates. If you are a bank and you make a loan, youhave to pay! Doesn’t sound like much of an incentive to me. The fact remains that central bankers can only go so far with monetary policy and already low rates and swollen balance sheets make things difficult. In his speech yesterday Mr. Draghi made a plea for sovereign state members to follow on with fiscal stimulus. I wrote about this in yesterday’s note. All said, yesterday’s news was mostly positive causing stocks to climb. Interestingly however, equity moves were somewhat muted considering the good news. A few weeks back markets would have soared. Perhaps buyers are a bit nervous to buy into equities with indices hovering just below 52-week highs. Additionally, some recently solid numbers have thrown into question the extent to which the Fed might cut rates at next week’s policy meeting. The beat goes on…
- No smiling matter. I have ben musing about the death, or permanent vacation (to put it less bluntly), of the unicorn IPO. Unicorns are privately held companies whose valuations are over $1 billion. As one might suspect they are largely financed by venture capitalists who are skilled at conjuring up PR and interest in their investments resulting in what many believe to be artificially high valuations. The problem with fake valuations based on hype is limited to the private investors themselves, not to mention the founders who would be smart not to be too quick to purchase that Banksy art collection. The problem becomes more widespread when these companies tap into the public markets for capital, relieving the private investors of dumping cash into the mostly losing ventures at increasing valuations. The two superlatives for public unicorns have been Lyft and Uber, both highly touted private companies whose public stocks have been punished since going public. Earlier this week I reported on the demise of the WeWork IPO which was initially slated to have a valuation of $45 billion. That valuation crept down rather quickly to about $15 billion and the offering was ultimately put on ice temporarily due to tepid demand (there are reports of a restructuring and a new attempt at re-listing). On Wednesday night SmileDirectClub, another unicorn, priced its IPO at $23 a share raising $1.35 billion from bankers who brought shares to the public yesterday. The stock opened nearly -10% below the offering price and ultimately closed down almost -$28% in the session. Bad news for investors hoping to score a win but good news for the company who pocketed $1.35 billion in fresh working capital. Perhaps investors should have taken heed from recent IPOs, or perhaps the stock performance of its competitor Align Technologies, whose shares have lost more than -50% in the last twelve months. Caveat emptor.
Stocks advanced moderately yesterday as trade tensions continued to ease and the ECB launched a stimulus package. Consumer prices rose slightly more than expected hinting that inflation may be coming back to the Fed’s target levels. The news did not stop the rally as the S&P500 climbed by +0.29%, the Dow Jones Industrial Average advanced by +0.17%, the Russell 2000 slipped by -0.04%, and the NASDAQ Composite Index traded up by +0.30%. Bonds slipped once again and 10-year treasury yields climbed by +4 basis points to 1.77%.
– The US Census Bureau will announce Retail Sales which are expected to have climbed by +0.2% month over month, down from last month’s +0.7% growth.
– University of Michigan Preliminary Sentiment is expected to come in at 90.8, up slightly from the prior read of 89.8.
– Next week, we will get some regional Fed reports, Industrial Production, housing numbers, and the Leading Index. The big news will come from the Fed who will announce its policy followed by a press briefing next Wednesday.