Daily Archives: August 1, 2017

401(k) plans get a July boost, but beware of August

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Main Street investors with stocks in their retirement portfolios are about to see a nice bump in their balances: The Dow ended July at a record and closed in on a milestone of 22,000 after its best performance since February.

But investors need to stay alert in August, which is a tough month  for U.S. stocks, history shows. In the past 20 years, for example, the Dow Jones industrial average has tumbled an average 1.4% during August, the worst performance of all 12 months, according to Bespoke Investment Group.

In July, the Dow rose nearly 550 points, or 2.6%, finishing at record highs in four straight sessions and topping its average returns for the month over the past 20, 50 and 100 years, Bespoke data show

The Dow closed at 21,891.12 Monday, making July the best month since February.

Powering the Dow higher were shares of Boeing. The maker of commercial airplanes and defense aircraft took flight and jumped 22.7% for the month, including a 14.2% rally since reporting second-quarter earnings on July 26 — which beat Wall Street estimates — and hiking its full-year sales forecast.

Stocks overall have gotten a lift from strong earnings across Corporate America. Also helping: rebounds in U.S. job growth and second-quarter economic expansion after a sluggish start to the year.

Companies in the Standard & Poor’s 500 stock index are collectively on track for profit growth of 10.8%, putting the index on pace for its first back-to-back quarters of 10%-plus earnings growth in six years.

Asked what the main driver of stocks were in July, Quincy Krosby, chief market strategist at Prudential Financial, said: “Earnings, earnings, earnings.”

The other major U.S. stock indexes also recorded gains. The S&P 500, which is made up of the nation’s biggest stocks and tracked by popular low-cost index funds and ETFs, rallied nearly 2%. The technology-packed Nasdaq composite gained 3.4%, pushing its market-leading gain for 2017 to nearly 18%.

Stocks, which also benefited from stronger growth around the globe, were able to shrug off obstacles, Krosby notes.

“Earnings have helped the market eclipse mounting concerns that the pro-growth, pro-business White House agenda is stalling amid political disarray,” she said. “Worries over escalating tensions with North Korea have so far eluded the market’s climb.”

Looking ahead, “unfortunately for investors we are about to enter the worst two-month period of the year for stocks,” Bespoke Investment Group noted in a commentary.

Stocks are at risk in August of being upended by volatile trading on days when most Wall Street pros are on vacation, as well as worsening geopolitical threats and events from places like North Korea and Russia, says Joe Quinlan, a market strategist at U.S. Trust.

“There are some risks in August,” Quinlan warns.


source https://www.usatoday.com/story/money/2017/07/31/401-k-plans-get-july-boost-but-beware-august/525288001/

MUFG investment bankers may move to Amsterdam

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Hundreds of staff could move as part of the Japanese investment bank’s Brexit contingency planning

Japan’s biggest bank MUFG is eyeing Amsterdam as the new European Union base for its investment banking business.

According to a report in the Financial Times yesterday hundreds of jobs could move from London to Amsterdam as part of its Brexit contingency planning.

Although Amsterdam is the clear favourite, the bank has not completely closed off other options, the FT reports.

A spokeswoman for MUFG in London said: “As has been reported, we are considering our options around MUFG Securities and the need to establish a new subsidiary within the EU. We are working closely with regulators to ensure that we reach a solution that is in the best interests of our clients.

“However, until we conclude our discussions, we are unable to confirm specific plans. London is and will remain MUFG’s Emea headquarters. There is no change in our commitment to the UK and EU markets.”

Several international banks have made announcements in recent weeks about where they plan to move staff or expand operations to deal with the Brexit fallout. Frankfurt is emerging as the favourite, with Morgan Stanley and Citigroup among the large, global banks to have chosen the German city.

If MUFG does make Amsterdam its EU hub, it will be the first international bank to do so. Its domestic rivals Nomura and Daiwa Securities have also chosen to locate their EU headquarters in Frankfurt.

There is still little clarity on what Brexit might mean for the UK operations of financial services firms, or how much access they might have to the EU from their London offices after the UK has left the bloc. But banks have been getting ahead and putting strategies in place, partly prompted by the Bank of England’s request that they submit their Brexit contingency plans by July 14.


source https://www.fnlondon.com/articles/mufg-investment-bankers-may-move-to-amsterdam-20170731

WARNING: European Central Bank propping up EU’s ‘zombie banks will DESTROY Europe

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EUROPE’S economy is fundamentally flawed with the European Central Bank (ECB) keeping alive “zombie” companies and banks, the head of a German economic think tank has warned.

The Institute for Economic Research (IFO) in Munich has revealed that the economies across the European Union (EU) are still being hindered by the large amount of “zombie” economies – those companies and banks that are in difficulties but are being kept alive by toxic loans and debts.

President of the IFO Clemens Fuest said: “The problem of zombie companies and banks is still serious. Especially in Greece, Italy and Portugal, the proportion of bad loans in bank balances is still far too high.”

According to a recent study by the Bank of America, some nine per cent of the largest exchange-traded companies in Europe are currently such undead companies.

This refers to highly indebted, unprofitable enterprises, that while are still generating cash and managing to cover both fixed and running costs they only have enough money to cover the interest on outstanding loans but not the actual debt itself and as such rely on the banks for their continued existence.

Last summer, up to 11 per cent of the companies included in the Euro Stoxx-600 were temporarily included.

Before the outbreak of the financial crisis in 2008, the share of zombie companies in Europe was only six per cent.

Mr Fuest added: “It is part of the structural change that companies whose business model no longer works close down and capital and labour are shifted to new companies.”

The loose monetary policy of the ECB is an important, albeit not the only, reason for this distortion according to the economist.

He said: “The zero interest rate policy is certainly helping companies, which would have to file for bankruptcy with higher interest rates, stay on the market.

Heads of the ECBGetty

President of the European Central Bank Mario Draghi (R) and Vice President Vitor Constancio

“However, it is fair to say that the causes of the zombification are manifold. This includes, of course, the poor general economic development in parts of southern Europe. Bankruptcy law and banking supervision are also responsible.”

A conflict would arise if the inflation rate continues to rise higher than it was today and the mandate of the ECB to maintain price-level easing would conflict with the efforts to avoid burdening heavily indebted states and banks.

Deka’s chief economist Ulrich Kater also warned of possible conflicts the European monetary watchdogs might face because of the zombifying of the economy as soon as the current economic climate changes.

ECB headquartersGetty

The headquarters of the ECB

He said: “An increase in interest rates will, in particular, reveal weaknesses where a large proportion of loans are already considered unrecoverable, especially in Italy.

“Some states in Europe, whose debt rates would rise uncontrollable as a result of exceeding certain interest thresholds might also find themselves becoming zombie companies in the broader sense.”

He added: ”Europe must at some time decide whether it can control public debt dynamics jointly within the framework of the European monetary union, or whether this would be left up to each state itself with its own currency. In the latter case the whole monetary union would have been a zombie company.”

source http://www.express.co.uk/finance/city/835269/EU-eurozone-zombie-banks-ECB-IFO-think-tank-Clemens-Fuest

London Metal Exchange: what’s next for the new lord of the ring?

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When investment banker Matthew Chamberlain was advising on the historic sale of the London Metal Exchange five years ago, he had no idea that by the age of 34 he’d become its boss.

“That was not on the radar,” the former UBS banker says from the LME’s new headquarters in Moorgate – its fourth base since it was created in 1877 above a hat shop in Lombard Street.

“As a mergers and acquisitions banker if you just stay in M&A you never see the result of the deal that you work on. Most of my 2012 had been learning about this place – things that I’m doing today are things that I first read about when [Hong Kong Exchanges & Clearing] was looking at buying this company.”

The £1.4bn sale to HKEX, one of the largest exchanges in the world, was a landmark moment for the 140-year-old London institution.

LME traders must always ensure one heel is touching the seat from which they trade from CREDIT: BLOOMBERG

The LME trades most of the world’s metals via the “ring” – the last trading pit in Europe in which traders shout out bids and offers, barking numbers for the sale of metals such as copper, tin, zinc and aluminium while having to keep their heels on the red leather sofa arranged around the circle.

But life has not been easy since the LME fell in to HKEX’s hands.

A rise in trading fees two years ago caused trading volumes to slip 4.3pc in 2015 and 7.7pc last year as frustrated members moved elsewhere.

Tradition isn’t always a positive thing, people often want to modernise. But there’s a huge loyalty and bond between the exchange and its members

Chamberlain’s rise to the top of the exchange also happened at lightning speed – this time a year ago he was head of business development, but the abrupt departure of the company’s chief operating officer and head of strategy followed by the sudden exit of chief executive Garry Jones weeks later meant that by April he was catapulted into the top job.

Now faced with the daunting task of turning things around, does the former banker still think the takeover he helped create has been a success?

“The simple answer is yes, the acquisition has worked,” Chamberlain says, adding that the process has been complicated by the fact the exchange was previously member owned.

“A number of issues we [HKEX] inherited had been bubbling along for some time. Some of the questions on balancing tradition and modernity had been active for many years, but it was only once owned by HKEX that they really came to the fore.”

Eager to start off on the right foot, Chamberlain launched a discussion paper earlier this year to pinpoint exactly what the exchange could do to become more competitive and lure volumes back.

After two months of meetings with clients to discuss the proposals – aimed at drawing business back towards the LME – he has one more month to firm up a new strategy, having set himself a target date of early September.

A number of the measures being considered, and which will likely come up at an LME board meeting taking place this week, centre around costs.

They include reducing fees on so-called short-dated carries, a type of trade that brings expiring contracts forward, slashing costs for those trading on the ring and combining trading and clearing fees to make the process simpler for users.

“We have a commercial interest on making sure the fee structure is fair and proportionate [so we’ve said] to the market – tell us where the fees work for you and where they don’t, and we’ll see what we can do,” Chamberlain said, adding that the challenge is getting the balance right when different corners of the market have contrasting opinions on how the exchange should evolve.

“There are a whole bunch of issues where we need to hear the views of the market [before coming up with a new strategy].”

Stephen Fry
Stephen Fry has likened the LME to a bear pit CREDIT: PA

But winning back business isn’t just about bringing down fees – the exchange mirrored recent moves made by two of its US rivals, CME Group and the Intercontinental Exchange, earlier this month by launching new gold and silver contracts, and Chamberlain says he wants to make sure the group is ready for changing technology that could impact the demand for certain metals in the years ahead.

The increasing use of electronic cars, as an example, will see demand rocket for cobalt and lithium needed to make car batteries.

The exchange’s new strategy also needs to be as much about the old as it is about the new. As most other markets have moved to all-electronic models, it is a rare sight to watch the five-minute trading windows take place around the ring – dealers scream prices over each other, with clerks at the back yelling to clients with a phone to each ear.

Actor Stephen Fry, having visited the ring himself back in 2013, described the experience on Twitter as “like a bear pit”.

In this arena, ancient rules are unlikely to change under Chamberlain’s watch. Traders are still not allowed to chew gum, are expected to always keep their top button fastened, and can only remove their jackets in the summer if it’s really hot and they have permission from the ring manager.

“Tradition isn’t always a positive thing, people often want to modernise. But there’s a huge loyalty and bond between the exchange and its members, and I think a lot of that comes from the traditions of this place,” Chamberlain said.

“In a world of electronic exchanges, we maintain the floor as our core pricing venue, we try to stay close to the underlying market, we never forget that we’re here to service the needs of the metals community.”


source http://www.telegraph.co.uk/business/2017/07/30/london-metal-exchange-next-new-lord-ring/

Rand breaches R13.30/$ on ratings jitters

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Cape Town – The rand extended its losses on Tuesday, breaching the R13.30 to the US dollar level as credit rating fears resurfaced.

RMB economist Ilke van Zyl said a credit downgrade could trigger as much as $10bn worth of portfolio outflows from South Africa.

By 13:01 the rand was trading at R13.28/$ after reaching R13.31 earlier in the session.

A recent report from Moody’s flagged ongoing structural growth concerns and worries over the independence of the SA Reserve Bank (SARB) after Public Protector Busisiwe Mkhwebane on June 19 instructed that Parliament must change the Constitution to make SARB’s focus the “socio-economic well-being of citizens” instead of inflation.

The North Gauteng High Court in Pretoria heard on Tuesday that Mkhwebane was in serious error when she ordered SARB’s Constitutional mandate to be changed.

SARB’s counsel formally presented its matter to have the Public Protector’s remedial action set aside.

‘Reckless’ decision

David Unterhalter SC, who represented the SARB, said that although the Public Protector is not opposing the matter, she has failed to apologise or recognise that she took a “reckless” decision in issuing the remedial action.

She had not consulted with the SARB beforehand to understand the consequences that would develop from the “radical” and “destabilising” finding, he said. “It would be sensible to at least tell the SARB this is what you have in mind and ask them what are the consequences.”

He argued that the remedial action could lead to a further credit downgrade, and poor South Africans would suffer the most.

SARB governor Lesetja Kganyago also on Tuesday told Parliament’s standing committee on finance that the SARB is a “creature” of the Constitution and it is mandated to protect financial stability in the country.

“The bank has a duty to protect South Africa’s currency in the interest of balanced and sustainable growth. We are mandated to protect financial stability in South Africa,” Kganyago said.

Ratings agencies have cited the independence of the SARB as a key strength, and any move to erode that could lead to further downgrades, particularly after President Jacob Zuma removed Pravin Gordhan as finance minister in March.

“Should the agency decide to downgrade SA, the local and foreign currency credit ratings will be in the sub-investment category – this will leave only S&P to downgrade for the country to be removed from the coveted World Government Bond Index,” said Van Zyl.

Moody’s is scheduled to decide on SA’s credit rating next Friday August 11, while S&P is expected to release its decision on November 24.

Van Zyl, however, said she doesn’t expect any changes in SA’s credit ratings this year.

“We think the October MTBPS (mini budget) will not show any undue slippage. We forecast another downgrade in 2018 in the absence of sufficient structural reforms,” said Van Zyl.

She said trade data as well as a recovery in portfolio inflows are rand supportive.

The SA trade balance posted another large surplus in June, coming in at R10.7bn. This caused the 2Q17 surplus to jump to R22.8bn — the largest in six-and-a-half years.

Foreigners have also been net buyers of SA bonds over the last 17 days and increased their holdings by R474m on Monday.

“With global FX carry indices sitting at their highest since 2014, valuations of EM currencies and yields are becoming more compelling,” said Van Zyl


source http://www.fin24.com/Markets/Currencies/rand-breaches-r1330-on-ratings-jitters-20170801