Thursday April 20

Stocks rose today on news that Trump was going to impose tariffs on steel imports as well as hopes that tax reforms will be here soon. The S&P 500 rose 0.8% to 2,355 and the Dow Jones rose 0.9% to 20,578. The KBW Bank index was up 1.9% while utilities fell 0.4%. Jerome Powell spoke today and came across as in favor of financial deregulation. He said that too big to fail rules were “unnecessarily burdensome” and suggested living wills every other year instead of every year. On the campaign trail Trump promised to benefit American heavy industry and today’s announcement that he could charge steel imports is intended to “put new American steel into the spine of this country.” He was able to invoke the investigation because steel is considered critical to the economy and military. Steve Mnuchin said that he expects tax reform proposals to be released “very soon.” American Express released earnings today and the stock price rose 6% as a result. So far 75% of companies that have reported have beat EPS and earnings growth is 10.8%. The two year Treasury was unchanged at 1.20% and the ten year Treasury rose 2bp to 2.24%. Accordingly 2yr vs 10yr bear steepened to 1.04%. The dollar was mixed on the day against peers. USD fell less than 0.1% to $1.0718 against EUR. USD rose 0.4% against JPY to Y109.29. USD fell 0.3% against GBP to $1.2815 as the pound holds its gains after Tuesday. Oil prices were flat after a volatile day yesterday. WTI fell 0.4% to $50.26 and Brent was unchanged at $52.94.

Virtu acquired KCG for $1.4bn in cash. Virtu’s share price as up 10% while KCG was up 11.3%. That is reflective of tough conditions in the high frequency trading sphere as profits have reduced amid higher competition. That explains why Virtu was looking to acquire KCG as KCG also does market making which helps Virtu diversify its business. The combined firm will make up 20% of the daily trading volume in US equities which puts them level with Citadel at the top of the list. Combined, HFT strategies only earned $1.1bn last year compared to $7.2bn in 2009. Since going public Virtu’s share has fallen 25% as the stock price adjusted lower to reflect the tougher operating enironment. KCG is very big in the retail wholesaler market meaning that they pay brokerages such as TD Ameritrade and Fidelity for the right to execute their trades. By having access to retail order flow Virtu hopes that could bolster its strategies. The combined company will save $208mm in costs over the next two years in expenses including data feeds and high speed connections. JP Morgan advised Virtu on the deal and Goldman Sachs advised KCG.

BlackRock made an announcement today which is bullish for Chinese equities as well as authorities in China who have been pushing for more international investment. MSCI is currently in the process of deciding whether or not to include Chinese stocks in its MSCI indices which would be a big step for China. If they were to be included that would mean many managers would look to buy Chinese stocks in order to match the index. BlackRock today said they support having Chinese companies being in the index. That follows a similar statement from Deutsche Asset Management regarding inclusion in its ETFs. MSCI makes its decision on whether or not to change its indices in June. In the past MSCI has argued that markets aren’t accessible or transparent enough and for that reason weren’t included in indices. Other complaints have related to ownership laws and limitations on the amount of money international investors can own in domestic shares and withdraw once invested. However there is now grounds for the index provider to include the $7.8tn market in its products. They could be included in popular indices such as the MSCI Emerging Market index or the All World Index. SocGen projects that inclusion would result in $13bn in inflows into the Chinese equity market. China’s regulators have been trying to address concerns and lobby for their inclusion. MSCI has said that China is doing a good job at addressing concerns however it did reduce the number of stocks it is considering to include by 66% to 169. That would make up just 0.5% of the emerging market benchmark so it would for the most part be a symbolic gesture. That would be a small way for Chinese authorities to limit capital outflows however it most likely wouldn’t have a huge effect immediately.

Investors are anticipating that Opec will extend its production cut which is set to expire in May. The energy minister in Saudi Arabia said that consensus is building for extending the cut and that a preliminary agreement has been reached. That could result in the agreement that was made in November being extended from anywhere between 3 to 12 months. That would be welcome news for oil producers as supply levels have been resilient to low prices. Saudi Arabia has been shouldering the majority of the cut and making up for countries that aren’t complying under the current program.

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Thursday April 20

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