Latest market-sensitive news and views - Nov. 6
U.S. House GOP leaders still mulling options for stopgap spending bill to avoid gov't shutdown
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— Equities today: Asian and European markets were mostly higher in overnight trading. U.S. Dow opened up around 30 points higher. In Asia, Japan +2.4%. Hong Kong +1.7%. China +0.9%. India +0.9%. In Europe, at midday, London flat. Paris -0.5%. Frankfurt -0.3%. South Korea is prohibiting stock short selling until June 2024, in a move that triggered a big rally for equities and increased trading volumes. The benchmark KOSPI and the tech heavy KOSDAQ soared 5.7% and 7.3%, respectively, resulting in both indexes closing out their best session since late March 2020.
The Hang Seng, Hong Kong's stock market index, experienced a significant surge, gaining 302.47 points 1.71% to close at 17,966.60 on Monday. This marks the third consecutive session of bullish momentum. Several factors contributed to this positive performance:
U.S. equities Friday and for the week: All three major indices registered their best weekly gains of the year in the wake of the subdued jobs report. For the week, the Dow was up 5.1%, the Nasdaq rose 6.6% and the S&P 500 added 5.9% — the index is up 14% this year.
On Friday, the Dow was up 222.24 points, 0.66%, at 34,061.32. The Nasdaq gained 184.09 points, 1.38%, at 13,478.28. The S&P 500 rose 40.56 points, 0.94%, at 4,358.34.
Bond yields tumbled for the week, with the 10-year Treasury yield sliding to 4.57% after touching 5% in recent weeks. The shorter-end more rate-sensitive 2-year yield was down 11 basis points to 4.86%. The 30-year yield fell 0.273 percentage point to 4.75%, marking its largest one-week decline since March 6, 2020.
Oil prices were lower Friday and lower week over week. WTI traded down $1.95 or -2.4% to close at $80.51. Brent traded down $1.92 or -2.3% to close at $84.89. WTI was down $5.03 per barrel week-over-week. Brent was down $5.59 per barrel week-over-week.
— Warren Buffett's conglomerate, Berkshire Hathaway, had a robust quarter with operating earnings surging by over 40% to reach $10.76 billion. Additionally, the company's cash reserves reached a record high of approximately $157 billion by the end of September. This significant cash accumulation reflects Berkshire Hathaway's financial strength and its ability to make strategic investments or acquisitions. In terms of stock performance, the company's Class A shares have seen a nearly 14% increase in value this year, indicating investor confidence in its performance and management.
— Quotes of note:
— Germany's service sector experienced a contraction in October, as indicated by a survey conducted by S&P Global and Hamburg Commercial Bank. The purchasing managers' index (PMI) for the country dropped to 48.2, a decrease from 50.3 in September. In the context of PMI, a reading below 50 typically signifies a contraction in the sector.
Meanwhile, the Eurozone also saw a decline in business activity. The PMI for the euro zone decreased from 47.2 in September to 46.5 in October. This reading is the lowest recorded in nearly three years, indicating a significant contraction in business activity across the Eurozone during that period.
— Outside markets: The U.S. dollar index was weaker, with the euro, yen and British pound all firmer against the greenback. The yield on the 10-year U.S. Treasury note was firmer, trading around 4.6%, with a mixed tone in global government bond yields. Crude oil futures maintained gains seen overnight, with U.S. crude around $81.50 per barrel and Brent around $85.80 per barrel. Futures rose in Asian trading following Russia and Saudi Arabia opting to not change their output policies. Gold and silver futures were under pressure ahead of US market action, with gold around $1,991 per troy ounce and silver around $23.25 per troy ounce.
— Steel prices have risen to a six-month high due to strong demand, reduced inventories, government support for infrastructure projects, and environmental factors affecting supply in key production areas. Several factors have contributed to this rise in steel prices:
— Container shipping lines, including A.P. Moller-Maersk, are facing significant challenges, with a sharp decline in profits and the need to cut more than 10,000 jobs. A.P. Moller-Maersk's profits have plummeted from $8.88 billion to $521 million, and its core Maersk Line container revenue has fallen by 56% compared to the previous year. The most concerning signal is that the Ocean division has posted a loss for the first time in several years. A Wall Street Journal report says these challenges go beyond the typical cyclical trends in the shipping industry. Container lines have ordered too many ships, leading to overcapacity and a decline in freight rates. Unlike retailers, who can reduce their inventory during periods of overstock, carriers cannot easily eliminate excess capacity. A.P. Moller-Maersk's job cuts indicate their preparation for a prolonged period of supply-demand imbalance in the industry.
— India to extend free food program by five years. India plans to extend its free food grains program by five years, Prime Minister Narendra Modi said on Saturday, as the government tries to shield consumers from rising food prices ahead of a general election early next year. The extension will offer relief to consumers, but it will also lead to higher government spending and require New Delhi to procure more wheat and rice from farmers to sustain the welfare program. However, a government source contended there will not be a major fiscal impact in 2024 and 2025 because of the extension, calling the situation "manageable."
— Wheat futures have experienced a rebound, reaching the level of $5.70 per bushel. This rebound comes after hitting a one-month low of $5.56 on October 31. The increase in wheat prices is attributed to ongoing supply uncertainty in Europe's major wheat-producing region. There have been reports of the Russian military shelling Black Sea shipping routes in Ukraine, which has raised concerns about the safety of civilian ships involved in grain trade from Ukrainian ports. Meanwhile, drier weather conditions in Argentina and Australia have eased previous expectations of abundant wheat supplies from these key producers. However, poor wheat crop prospects in Brazil have traders signaling the need for imports, initialy from Argentina. Despite the recent rebound, wheat futures remain nearly 28% lower year-to-date due to strong supplies from other sources. According to the latest WASDE (World Agricultural Supply and Demand Estimates) report from USDA, Russia is expected to produce 85 million tonnes of wheat in the 2023/34 marketing year, resulting in record-high exports of 50 million tonnes for that period, making Russia the largest wheat exporter in the world.
— Ag trade update: Algeria tendered to buy 50,000 MT of optional origin soft milling wheat.
— Over the course of this week, more than 60 record-high temperatures are anticipated in various regions from Arizona to New York. The unseasonably warm conditions are expected to persist from today through Wednesday. Initially, the above-average temperatures will affect parts of the southwestern United States and gradually spread eastward as the week progresses, as indicated by meteorologists. However, this warm spell is not expected to last long in some areas, as cold air is predicted to return by Friday. For example, St. Louis is projected to experience a sharp temperature drop, going from a high of 83 degrees on Wednesday to 61 degrees. Similarly, Denver and several other Western areas are expected to see a rapid decline in temperatures, transitioning from highs in the mid-70s on Tuesday to the high 40s within a single day.
— House on Friday passed a bill known as the Stop Harboring Iranian Petroleum Act (SHIPS) in a decisive vote of 342-69 — 133 Democrats joining all but one Republican. This bill calls for sanctions on entities involved in Iranian oil exports, including port owners and operators of vessels transporting Iranian oil. It also places pressure on the Biden administration to address Iran's support for Hamas in the aftermath of the recent attack on Israel. The administration had frozen $6 billion in Qatar, originally intended for negotiations concerning American hostages, due to the attack. While a companion bill exists in the Senate, it has not yet been scheduled for a vote.
— No action likely this week on House stopgap spending plan. House Republicans are not expected to attempt passing a stopgap funding bill this week, according to reports. Government funding is set to run out on Nov. 17, and if the House does not pass a continuing resolution (CR) this week, Congress will face a tight deadline next week. House Speaker Mike Johnson's (R-La.) leadership team reportedly is considering the possibility of a "laddered CR," which would fund individual government agencies on a rolling basis. They are also exploring the option of attaching aid for Israel to a stopgap funding bill.
Up next: The House Republican Conference will discuss their strategy for addressing government funding this week.
— Latest developments in the Israel-Gaza conflict:
— Moscow has found ways to circumvent a Western price cap on Russian oil, moving crude on a fleet of aging tankers on which the sanctions have limited traction. The discount at which Moscow sells its oil relative to global prices has shrunk, boosting Russia's war chest, the Wall Street Journal explains. The U.S. and its allies are discussing new ways to tighten enforcement and squeeze Russia's profits.
Of note: Oil and gas tax revenue to the Russian budget in October more than doubled from September.
— Gallup, a prominent polling and consulting group based in Washington, has decided to withdraw from China, becoming the latest foreign company to do so amid increasing scrutiny of western consultancies and growing geopolitical tensions. Gallup had been operating in China since 1993, with offices in Beijing, Shanghai, and Shenzhen. It employed dozens of staff who worked as consultants to help Chinese companies restructure and improve their marketing strategies. Conducting public opinion surveys was challenging due to strict Chinese regulations governing foreign organizations conducting such surveys. As a result, Gallup informed its clients this week that it would be retreating from China, relocating some projects outside the country, and canceling others. The company released a statement saying, "Regrettably, Gallup has made the decision to close its operations in China." The Chinese state-owned tabloid Global Times accused Gallup of serving as a tool to contain China and maintain U.S. dominance.
— Foreign companies are pulling profits out of China.After years of plowing money made in China back into China, foreign companies are now taking their earnings out of the country amid slowing economic growth and tensions between Beijing and Washington. The Wall Street Journal looked into an unusually sustained run of profit outflows that has pushed overall foreign direct investment in the world's second-largest economy into the red for the first time in a quarter of a century.
— Treasury Secretary Janet Yellen is scheduled to meet with her Chinese counterpart, He Lifeng, who is the Chinese Vice Premier. These talks are set to take place on Nov. 9-10 in San Francisco. This meeting represents a move towards improving and normalizing relations between the U.S. and China. It also precedes the anticipated meeting between President Joe Biden and Chinese President Xi Jinping at the upcoming APEC (Asia-Pacific Economic Cooperation) summit.
— Chinese Premier Li Qiang pledged to expand market access and boost imports as part of efforts to stimulate economic growth and maintain openness in China. He made these commitments in a speech at the China International Import Expo in Shanghai. Key points from Li Qiang's speech and related developments include:
Bottom line: Premier Li Qiang's speech at the China International Import Expo underscores China's commitment to openness, boosting imports, and protecting foreign investors' rights amid economic challenges and evolving international dynamics. It also reflects efforts to address concerns related to data regulations and promote trade cooperation with other countries.
— China says Australia's exporters can come back. Some say no thanks. Trade leads agenda for Anthony Albanese on first visit by Australian leader to China since diplomatic rift in 2020. Link for more via the Wall Street Journal.
— BBC News: The U.S. is quietly arming Taiwan to the teeth. When President Joe Biden recently signed off on a $80 million grant to Taiwan for the purchase of American military equipment, China said it "deplores and opposes" what Washington had done.
— Brookings Institution: Peak China: Why do China's growth projections differ so much? Are China's problems merely a slump, or signs of lasting decline?
— An almost century-old trade rule called "de minimis" is causing new challenges for U.S. retailers, particularly in the face of e-commerce competition, the New York Times' DealBook reports.
Background. The "de minimis" rule exempts packages shipped into the U.S. from duties and fees if their value is less than $800. In other words, packages worth less than $800 are not subject to import taxes or charges.
Chinese-founded online retailers like Shein and Temu have disrupted the U.S. retail industry by delivering merchandise directly from their overseas warehouses to customers' homes. Because of this, most of their packages are valued at less than $800, allowing them to avoid duties and fees. They are estimated to account for around 30% of daily packages shipped under this provision.
Products made overseas and shipped in bulk to the U.S. by traditional retailers are typically stored in U.S. warehouses before being sent to customers. These products are less likely to fall under the $800 threshold and are thus subject to import fees.
U.S. retailers argue that the de minimis rule puts them at a competitive disadvantage. They believe that if the rule is not changed, it could lead to job losses in the United States. Some U.S. retailers are urging Congress to expand the de minimis rule to include U.S. distribution centers located in foreign trade zones. In these zones, companies are not required to immediately pay duty fees for imported products, allowing them to manage cash flow more effectively.
Some industry leaders prefer alternative approaches. For instance, there is support for legislation that would exclude "nonmarket economies" like China and Russia from using the de minimis exception. Others even advocate for banning all e-commerce shipments from utilizing the de minimis exception.
Incentive for offshoring. Critics argue that the current de minimis rule creates an incentive for companies to move their distribution offshore to take advantage of the exemption. They seek to address this issue through changes to the rule.
— Is global trade really in decline? Depends on what you are using to calculate the answer. A Wall Street Journal item notes that two conflicting sets of data provide differing perspectives on the state of globalization:
Bottom line: The article suggests that the apparent contradiction between these two sets of data can be resolved by considering that the value of trade might be decreasing because items being shipped are becoming cheaper per ton. This could occur due to falling prices per ton, a shift in the mix of traded goods towards lower-cost items, or both. For example, raw materials like lithium have become important in various industries and are cheaper per ton compared to high-value consumer goods like iPhones. The article also highlights that a significant portion of global trade involves bulk goods like agricultural products, natural resources, or refined petroleum, which have lower prices per ton. Additionally, international trade in services, which includes cross-border financial services, telecommunications, and intellectual property, has continued to rise. The conclusion is that while traditional trade metrics may suggest a decline in globalization, alternative measures such as ton-kilometers and the persistence of global supply chains indicate that globalization might be more resilient than previously thought.
— Chinese scientists claim anti-ageing breakthrough with spinal cord discovery. Researchers find protein at ‘toxic' levels surrounding motor neurons of older monkeys and test whether vitamin C really makes a difference. Link to details via the South China Morning Post.
POLITICS & ELECTIONS — David Axelrod, the former Obama adviser, is openly wondering whether Biden should run for re-election. While conceding that it's late for Democrats to change candidates, he wrote of Biden, "What he needs to decide is whether that is wise; whether it's in HIS best interest or the country's?"