Wall Street Breakfast: What Will February Bring?

by: Wall Street Breakfast
Wall Street Breakfast
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Equities enter the new month on shaky ground, following the S&P's worst January since 2009 (-5.1%) and a volatile month for oil prices. About a fifth of S&P 500 companies will report earnings this week, while lots of economic data (manufacturing figures, auto sales and Friday's jobs report) could also help determine the future direction of stocks. Central bank talk could be yet another influence on the markets: Fed Vice Chairman Stanley Fischer will speak this afternoon on the economy, while Mario Draghi discusses the ECB's annual report. BOJ Governor Haruhiko Kuroda is scheduled to speak Wednesday after the central bank's surprising shift to negative interest rates.


China's official factory activity skidded to a three-year low in January, adding to further gloom about the state of the world's second-largest economy. The official Purchasing Managers' Index stood at 49.4, compared with the previous month's reading of 49.7, deepening the case for near-term stimulus and marking the sixth consecutive month of factory activity contraction. The mood was worsened by a private survey from Markit/Caixin that showed January manufacturing activity shrinking for the eleventh straight month.

Meanwhile, China's leaders are expected to target growth in a range of 6.5-7% this year, sources told Reuters, setting a range for the first time because policymakers are uncertain about the economy's prospects. A string of cuts in interest rates and bank reserve requirements over the last year have both failed to put a floor under the nation's economy. China's GDP grew 6.9% in 2015, the weakest in 25 years, although some economists believe real growth came in even lower.

Talks to end five years of war in Syria - that will see government and opposition representatives negotiate indirectly in Geneva - began this morning after barely averting a boycott by President Bashar al-Assad's opponents. U.S. Secretary of State John Kerry called the negotiations "a pivotal phase" in the diplomatic effort to curb violence in the region. Separately, Germany's Angela Merkel is trying to placate the increasingly vocal critics of her open-door policy for migrants by insisting that most Syrian and Iraqi refugees would go home once the conflicts there have ended.

A committee of the World Health Organization will meet today to decide whether the explosive spread of the mosquito-borne Zika virus constitutes a public emergency of international concern. Health officials and communities are already fixated on the rapid spread of the virus, particularly given signs that Zika is causing the devastating brain malformation in babies born to some women in and around the tropics. Over the weekend, Reuters reported that Colombian authorities found more than 2,100 pregnant women infected with the disease.

Argentina is resuming debt discussions with a group of U.S. hedge funds today after securing a $5B loan from Wall Street banks that will strengthen its hand in negotiations to end a decade-long legal dispute. Finance secretary Luis Caputo is due to present an offer to the so-called holdout creditors, who rejected restructuring deals after Argentina's 2001 default and won a legal victory in the U.S. in 2012 that ruled that they should be repaid in full.

Puerto Rico officials may soon release details to the public of a proposal to restructure its $70B debt burden, Bloomberg reports. The plan may be revealed so that bondholders can participate in the negotiations without having to sign non-disclosure agreements, which limit them from trading the securities. According to several sources, the island presented a plan to creditors on Friday that asked them to take a deep discount on their debt - an aggregate of around 45%.

The U.S. presidential elections start in earnest today with the caucuses in Iowa, and the spotlight will be on precinct officials who have been trained on a new Microsoft (NASDAQ:MSFT) app that's meant to cut down on human error and speed up the reporting process. But not everyone is happy about the involvement of Microsoft (which is providing the app free of charge), with some questioning the tech giant’s motivations. According to the latest Des Moines Register poll, Donald Trump is likely to capture the support of 28% of caucus-goers compared to 23% for Ted Cruz, while Hillary Clinton holds a narrow 45% to 43% advantage over Bernie Sanders.


Credit Suisse and Barclays have agreed to pay $154.3M combined to settle investigations by the SEC and New York attorney general into their dark pools. "We will continue to take the fight to those who aim to rig the system and those who look the other way," Eric Schneiderman declared. The settlements mark the two largest fines ever paid in connection with cases involving the privately run stock-trading venues. CS -1.1%; BCS -1.9% premarket.

HSBC is imposing a hiring and pay freeze across the bank globally in 2016, sources told Reuters. Like numerous other lenders, Europe's largest bank is in the midst of a cost-cutting drive to boost profitability and returns to shareholders, while pushing through plans for annual cost savings of up to $5B by 2017. News of the freeze follows a significant week for HSBC, after its board met last week to consider moving its headquarters to Hong Kong and focus on strategy. HSBC -2.3% premarket.

The E. coli outbreak that affected dozens of Chipotle (NYSE:CMG) customers in nine states last year is expected to be declared over as soon as Monday, WSJ reports. Although it's been more than two months since any new illnesses have been reported, investigators still haven't been able to pinpoint the ingredient responsible for the contamination. Chipotle is also planning to start an advertising and social-media campaign soon to woo back its most loyal customers. CMG +3% premarket.

Coca-Cola has taken a 40% stake in Nigerian juice and snack producer Chi, as it continues to expand in Africa and diversify its beverage portfolio. One industry source said Coca-Cola (NYSE:KO) was paying a "triple-digit-million-dollar" amount for the stake. Coke "intends to increase ownership within three years, subject to regulatory approvals while working on other long-term commercial structures", the company said in a statement.

Berkshire Hathaway has resumed its purchases of Phillips 66 (NYSE:PSX), spending roughly $832M in January to boost its stake even as the oil refiner's profit margins narrowed. According to a regulatory filing, the conglomerate paid about $198M last week for 2.54M shares of PSX, giving it 72.29M overall, or a roughly 13.7% stake in the company. Phillips 66 is Berkshire's (BRK.A, BRK.B) sixth-largest stock holding.

Following a meeting with Sharp's board on Saturday, Taiwan's Foxconn Technology (OTC:FXCOF) said it was confident about its ¥625B (about $5.3B) offer for the struggling Japanese electronics maker, and expected the firm to come to a decision within a week. Foxconn's rival in the bid for Sharp (OTCPK:SHCAY), Innovation Network of Japan, is said to be discussing a capital injection of more than ¥300B, and up to ¥350B of financial assistance from the company's two main lenders.

Two government probes into the conduct of longtime antagonists Pershing Square and Herbalife (NYSE:HLF) have failed to find sufficient evidence of criminal wrongdoing by either party, according to WSJ. The U.S. attorney's office in Manhattan and FBI investigated claims that Herbalife has a fraudulent business model, and an inquiry into allegations that Pershing manipulated the company's stock price. The probes could be rekindled if additional evidence surfaces.

Tesla CEO Elon Musk has increased his stake in the EV automaker by exercising options at pre-IPO prices. Musk only paid $3.5M for the shares worth just over $100M, but had to pony up $50M to pay personal taxes on the transaction. The Tesla (NASDAQ:TSLA) stake held by Musk (who still holds 2.82M options he can exercise down the road) is close to 22% or about $5.5B at Friday's closing price of $191.20.

Volkswagen is not under pressure to sell its trucks business to raise cash, board member Andreas Renschler told Frankfurter Allgemeine Sonntagszeitung. There's been some speculation that a sale of the truck assets might be needed to fund costs from Volkswagen's (OTCPK:VLKAY) emissions cheating scandal. Renschler was tasked last year to increase efficiency by bringing truck assets MAN and Scania under the same holding company.

Toyota is halting production at all car assembly plants in Japan next week due to a steel shortage. The world's top automaker said an explosion at an Aichi Steel facility on Jan. 8 had curbed production of the metal used in auto parts including engines, transmissions and chassis. Toyota (NYSE:TM) produced 4M vehicles in Japan in 2015, roughly 46% of which were exported.

Just how much longer should cord-cutters be able to watch episodes from the current seasons of TV shows on Hulu (CMCSA, FOX/FOXA, DIS)? That is one question that has emerged in negotiations between media giant Time Warner (NYSE:TWX) and Hulu, which have been heating up lately, according to WSJ. The two sides have been in talks since late last year about Time Warner buying into the streaming site as a part-owner.

After much hype and anticipation, Nokia (NYSE:NOK) has settled a lengthy patent dispute with Samsung (OTC:SSNLF), but investors were disappointed by the financial terms of the deal. The agreement will lift sales of the company's patent division to around €1.02B ($1.1B) in 2015, including catch-up payments, from €578M in 2014. The annualized run-rate for the unit, which will become a smaller part of Nokia after its proposed €15.6B takeover of Alcatel-Lucent (ALU), is now about €800M. NOK -12.5%; ALU -12.7% premarket.

Today's Markets

In Asia, Japan +2% to 17865. Hong Kong -0.5% to 19596. China -1.8% to 2689. India -0.2% to 24825.
In Europe, at midday, London -0.4%. Paris -0.5%. Frankfurt -0.5%.
Futures at 6:20, Dow -0.2%. S&P -0.3%. Nasdaq -0.2%. Crude -1.1% to $33.24. Gold +0.6% to $1123.10.
Ten-year Treasury Yield flat at 1.93%

Today's Economic Calendar

8:30 Personal Income and Outlays
8:30 Gallup US Consumer Spending Measure
9:45 PMI Manufacturing Index
10:00 ISM Manufacturing Index
10:00 Construction Spending

Companies reporting earnings today