Wall Street Breakfast: Fed Concerns Spark Market Turmoil

by: Wall Street Breakfast
Wall Street Breakfast
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Fresh tremors are hitting global markets as a cautious tone from the Federal Reserve and another fall in crude prices fuel anxiety about the world economy. "Financial conditions in the United States have recently become less supportive of growth," Fed Chair Janet Yellen said Wednesday, highlighting risks that could delay the central bank's plans for raising rates. So what's happening out there? Investors are piling into safe havens such as gold and government bonds, while dumping U.S. dollars and selling equities. Yellen also returns to Capitol Hill this morning for a second day of testimony.


With Japanese and mainland Chinese markets closed for public holidays, Hong Kong stocks decided to take the regional selloff title today, as the market reopened after an extended Lunar New Year vacation. The Hang Seng index tumbled almost 4% to levels not seen since mid-2012, adding to a 12% plunge since the beginning of the year amid concerns of capital outflows, a slumping property market and China's economic slowdown.

Sweden's central bank has lowered its key interest rate even further below zero, saying it's prepared to use its full toolbox of measures as it battles to revive inflation and keep the krona from appreciating. "Uncertainty regarding global developments is still high, with low inflation and several central banks pursuing more expansionary monetary policy," the Riksbank said. The repo rate was reduced from -0.35% to -0.50% , while government bond purchases will continue as planned for the first six months of 2016.

Weren't low crude prices meant to stimulate growth for oil importers? Well it turns out there's been no overall positive effect as the world economy continues to lack impetus. Ifo's Index for the global economy dropped from 89.6 points to 87.8 points this quarter, drifting further from its long-term average (96.1 points). While assessments of the current economic situation brightened marginally, expectations were less positive than last quarter. Crude futures -3.6% to $26.46/bbl.

Dozens of South Korean trucks have returned across the North Korean border, laden with equipment and goods from the Kaesong Industrial Complex, after Seoul suspended operations there as punishment for the North's weekend rocket launch. Pyongyang called the South's decision regarding the park, where 124 South Korean companies employed about 55K North Koreans, a "declaration of war." Meanwhile, the U.S. Senate on Wednesday unanimously passed tough new sanctions on companies and individuals (including Chinese firms) involved in North Korea's nuclear and cyberwarfare programs.

Puerto Rico's Senate has cleared legislation that would enable the island's main electricity provider to restructure almost $9B of debt. The bill now moves to Puerto Rico's House of Representatives, which would need to approve it before Feb. 16, when the restructuring agreement between creditors and debt-laden PREPA expires. A previous deal had fallen apart in January after the territory's legislature had failed to pass the act by a previously agreed date.


Yahoo has made official its first wave of job cuts under a revitalization plan that aims to slash 1,500, or roughly 15%, of positions across a range of departments and titles. "None of the affected employees are represented by a labor union," Yahoo (YHOO) proclaimed in a notice filed with the California Employment Development Department, saying the 107 layoffs would take effect April 11.

Boeing plans to cut jobs in its commercial airplane division (the company's largest business), as part of cost reductions in the wake of market share losses to Airbus (OTCPK:EADSY), sources told WSJ. Ray Conner, chief executive of the Boeing (NYSE:BA) unit, reportedly told employees that the company will first seek to trim executive and managerial positions but that involuntary cuts may be necessary as a last resort.

European earnings roundup: Nokia (NYSE:NOK) posted better-than-expected profits, but warned of an impending slowdown in the telecom-equipment sector. Total's (NYSE:TOT) net loss narrowed in the fourth quarter after it booked fewer write-downs than a year earlier, while announcing plans to accelerate spending cuts. Citing a worsening global economy and sharp downturn in commodity prices, Rio Tinto (NYSE:RIO) swung to an annual loss and scrapped its progressive dividend policy. Societe Generale (OTCPK:SCGLY) reported fourth-quarter profit that missed analyst forecasts on investment bank woes and provisions for potential legal costs. Adidas (OTCQX:ADDYY) raised its outlook for the second time in four months after exceeding its revenue and profit targets for 2015. Although it plans to turn around its unprofitable general insurance unit, Zurich Insurance (OTCQX:ZURVY) disclosed a worse-than-expected loss in Q4.

Deutsche Bank expects to write down the value of its Postbank by about a third, ahead of a planned sale of the retail unit as part of a strategic overhaul. The institution's book value will be cut to €2.8B ($3.15B) because its current worth of €4.5B is seen as unachievable in either an IPO or a sale. Deutsche Bank (NYSE:DB) shares are down around 35% since the start of the year, leading a slump across the European financial sector.

HSBC has dropped plans to freeze pay this year while remaining cautious on the outlook for its revenues. "We have listened to feedback and as a result decided to change the way these cost savings are to be achieved," CEO Stuart Gulliver said in a memo. The announcement comes days before HSBC's board meets to discuss whether the bank should move its headquarters to Hong Kong or stay in London. HSBC -3.7% premarket.

Another part of the Dodd-Frank law went under the judicial microscope yesterday as a federal judge began hearing MetLife's (NYSE:MET) lawsuit questioning its systemically important designation. A victory for the insurer would undermine what many consider to be the most important part of Dodd-Frank. A win for the Financial Stability Oversight Council, on the other hand, would enshrine D.C.'s power over major financial firms - power which didn't exist anywhere close to its present form prior to the financial crisis.

More trouble for Bill Ackman? The activist investor's hedge fund Pershing Square has fallen 8.2% so far in February, bringing its YTD return to -18.6%. The losses come after last year's dismal performance and a promise from Ackman stating it will be a period he "will not forget." Pershing ended 2015 with a 20.5% loss after posting a 40% gain in the previous year, which cemented Ackman's tenure as one of the hedge fund industry's biggest stars.

Amazon's board has decided on a $5B buyback program - good for repurchasing over 2% of shares at current levels. The new approval replaces a prior $2B authorization, and has no expiration date. It could also serve to offset the impact of stock grants - Amazon's (NASDAQ:AMZN) diluted share count totaled 482M in Q4, up 9M Y/Y.

Nearly one in five vehicles on U.S. roads is in need of repair of a safety issue serious enough to be involved in a federal government recall, according to Carfax. That means there are more than 47M cars nationwide with open recalls, up 27% from a year ago. NHTSA data shows that in 2015 there were close to 900 recalls affecting a record 51M vehicles.

Mylan has agreed to acquire Sweden-based Meda Aktiebolag for $7.2B in cash-and-stock, just three months after it gave up a seven-month-long pursuit of smaller rival Perrigo (NASDAQ:PRGO). Among the motivations for the deal, which is expected to be immediately accretive to earnings, was Mylan's (NASDAQ:MYL) desire to provide greater exposure to over-the-counter products and entry into the emerging markets. The news also came as the company reported Q4 results that underwhelmed analyst estimates. MYL -10.4% premarket.

Theranos' main retail partner has threatened to terminate its relationship with the blood-testing company unless it quickly fixes the problems found by federal inspectors at a laboratory in California, WSJ reports. The warning from Walgreens (NASDAQ:WBA) gives privately held Theranos a 30-day deadline that expires near the end of February to resolve major infractions that violate the U.S. law governing clinical labs.

Wednesday's Key Earnings

ARM Holdings (NASDAQ:ARMH) -8.8% after missing profit forecasts.
Cisco (NASDAQ:CSCO) +5.2% AH beating estimates, boosting dividend and buyback.
Expedia (NASDAQ:EXPE) +9.2% on strong bookings growth.
Tesla (NASDAQ:TSLA) +5.1% AH aiming high with 2016 guidance.
Time Warner (NYSE:TWX) -5% after movie results drive revenue miss.
Twitter (NYSE:TWTR) -6.6% AH on light Q1 outlook, flat MAU growth.
Whole Foods (WFM) +3.1% AH after topping expectations.

Today's Markets

In Asia, Japan closed. Hong Kong -3.9% to 18546. China closed. India -3.4% to 22952.
In Europe, at midday, London -2.3%. Paris -3.4%. Frankfurt -2.4%.
Futures at 6:20, Dow -1.8%. S&P -1.8%. Nasdaq -2%. Crude -3.6% to $26.46. Gold +2.7% to $1226.80.
Ten-year Treasury Yield -8 bps to 1.62%

Today's Economic Calendar

8:30 Initial Jobless Claims
9:45 Bloomberg Consumer Comfort Index
10:00 Yellen delivers semi-annual monetary policy testimony
10:30 EIA Natural Gas Inventory
1:00 PM Results of $15B, 30-Year Note Auction
4:30 PM Money Supply
4:30 PM Fed Balance Sheet

Companies reporting earnings today