Which markets did best from Berlin Wall’s collapse? Wall Street and the BRICs, of course By Reuters



By Marc Jones

LONDON (Reuters) – The toppling of the Berlin Wall made free market economics the norm across Europe – but which financial markets have done the best since then? Wall Street and the BRICs, of course.

While the events of 1989 redefined Europe’s boundaries, they also ushered in almost two decades of powerful economic liberalization and globalisation that took in China, India and Latin America – a wave that is only now cresting.

For a graphic on Latin American economic since the Berlin Wall fell, click https://fingfx.thomsonreuters.com/gfx/editorcharts/GERMANY-BERLINWALL-MARKETS/0H001QXHR9CB/eikon.png

They are not the only factor, by any means. Also at work is a 30-year drop in global borrowing costs as inflation has been beaten back – even amid a boom for commodity producers, whose resources China has gobbled up.

A reunited Germany cemented itself as Europe’s largest economy, but an analysis of market performance suggests that the biggest winners are Wall St, flagbearer of Western capitalism, and the emerging ‘BRIC’ economies – Brazil, India, China and Russia.

Since Nov. 9, 1989, the S&P 500 has surged 1,635% in value, stocks in eastern Europe’s largest economy Poland are up 550%, and Russia’s Moex has risen nearly 900% since it became firmly establish in the late 90s.

That compares to a 350% rise in the reunified German when calculated in dollar terms, 320% in MSCI’s broadest world stocks index (), and nearly 460% in its global emerging market equivalent. ()

“There are multiple stories here,” said SEB Investment Management’s global head of asset allocation, Hans Peterson.

“In combination with the growth in emerging markets when they were liberalized and when China opened up, there has been (the fall of) bond yields of course, and we have killed off inflation, more or less.”

For a graphic on Global markets since the fall of the Berlin Wall, click https://fingfx.thomsonreuters.com/gfx/mkt/12/8445/8370/Pasted%20Image.jpg

Borrowing on global capital markets has also exploded as part of the liberalization.

Data analyzed by State Street (NYSE:) Global Advisors shows that most of the $120 trillion worth of emerging market debt in the world has been issued since the fall of the Wall. Over $40 trillion of that is in China though, including $27 trillion in the last 10 years alone. In comparison, Russia has only around $2 trillion, partly as a result of Western sanctions brought in over the last five years as relations have soured again.

“China is now the world’s second largest bond market,” said State Street’s Abhishek Kumar. “That is the really significant thing.”

For a graphic on EM debt issuance, click https://fingfx.thomsonreuters.com/gfx/editorcharts/GERMANY-BERLINWALL-MARKETS/0H001QXHT9CH/eikon.png

Currencies have had to ride out devaluations and various debt or financial crises. Russia’s rouble has halved in value against the dollar since Soviet times, whereas a deutsche mark/euro amalgam is fractionally higher.

The big winner by far in economic growth terms behind the former Iron Curtain has been Poland, where GDP has ballooned by almost $600 billion. Next best have been $250 billion improvements in the Czech Republic and Romania.

In Asia, it has been overwhelmingly China, which now has an economy worth nearly $14 trillion a year. It had been gradually opening since the death of Chairman Mao in 1976, but picked up considerable speed in the 1990s, and joined the World Trade Organization in 2001.

For a graphic on East European economies since the Berlin Wall fell, click https://fingfx.thomsonreuters.com/gfx/editorcharts/GERMANY-BERLINWALL-MARKETS/0H001QXHN9C1/eikon.png.

For a graphic on Asian economies since the fall of the Berlin Wall, click https://fingfx.thomsonreuters.com/gfx/editorcharts/GERMANY-BERLINWALL-MARKETS/0H001QXHQ9C7/eikon.png

REBUILDING BARRIERS

The question many economists and investors are now asking, however, is whether these moves may be reversing.

The U.S. and China are locked in a trade war. Relations between Western countries and Moscow have chilled rapidly since Russia’s annexation of Crimea in 2014 and accusations that it meddled in the 2016 U.S. election, which Moscow denies.

Poland is ruled by an avowedly nationalist, eurosceptic party and Hungary and Serbia have been getting closer to Russia again.

In an Open Society poll published on Friday of around 12,500 citizens in Central and Eastern Europe, a majority of respondents in Slovakia (61%), Hungary (58%), Romania (58%), Bulgaria (56%), Germany (52%) and Poland (51%) believed democracy was currently under threat.

Markets have not yet taken a definitive view, but are grappling with the reality that most central banks have taken interest rates as low as they can go, and countries’ growth and finances is being sapped as their populations get older.

China’s blue-chip stocks have underperformed the S&P 500 by almost 30% since the outbreak of the trade war, but Russia’s stock and bond markets are some of the best-performing this year, and many of Eastern Europe’s markets are flying too.

“I think the momentum of ’89 is almost at its limits today,” said Didier Saint-Georges, managing director of the 35-billion-euro asset manager Carmignac.

“There is a huge rebellion against (political and economic) liberalism. It is being hugely challenged.”

For a graphic on Markets since trade war broke out, click https://fingfx.thomsonreuters.com/gfx/mkt/12/8449/8374/Pasted%20Image.jpg



Wall Street treads water as trade-fueled rally pauses By Reuters


© Reuters. Traders work on the floor at the NYSE in New York

By Arjun Panchadar and Agamoni Ghosh

(Reuters) – Wall Street halted a record run on Friday as U.S. President Donald Trump contradicted reports that the United States and China would roll back existing tariffs.

The S&P 500 and Dow Jones indexes had closed at all-time highs on Thursday after officials said both countries had agreed to roll back tariffs on each others’ goods in a “phase one” trade deal if it is completed.

But Trump said on Friday he had not agreed to roll back the tariffs, although Beijing would like him to do so. The news sent all three major U.S. stock indexes sharply lower, but they quickly recovered to trade near flat.

“Investors somewhere knew that there was an existing issue regarding the rollback of these tariffs and with record highs being set, a little consolidation is to be expected,” said Michael Geraghty, capital market strategist at Cornerstone Capital Group in New York.

Seven of the 11 major S&P 500 sectors were trading lower, with the energy sector shedding 1.51% as oil prices fell. Trade-sensitive technology stocks dropped 0.11%.

Still, the S&P 500 is on track for its best year since 2013, while the Nasdaq and blue-chip Dow are eyeing yearly gains after dropping in 2018, partly propelled by a rosy third-quarter earnings season.

Of the 430 S&P 500 companies that have reported results so far, nearly three quarters have beaten profit estimates, according to IBES data from Refinitiv. Those numbers, to some extent, reflect significantly lowered analysts’ forecasts.

Walt Disney Co (N:) gained 3.96% as its popular theme parks and a remake of “The Lion King” lifted earnings, and the company also spent less than it had projected on its online streaming service, Disney+.

At 10:32 a.m. ET the Dow Jones Industrial Average () was down 52.84 points, or 0.19%, at 27,621.96 and the S&P 500 () was down 2.47 points, or 0.08%, at 3,082.71. The Nasdaq Composite () was up just 5.28 points, or 0.06%, at 8,439.80.

Among other stocks, Gap Inc (N:) tumbled 8.14% after it said Chief Executive Art Peck would leave the company, a surprise exit in the middle of a restructuring. The apparel retailer also slashed its full-year earnings forecast.

Activision Blizzard Inc (O:) fell 1.36% after the video game publisher forecast fourth-quarter adjusted revenue below estimates, as it faces stiff competition from online and free-to-play games.

Energy drinks maker Monster Beverage (O:) was up 3.53% after posting a better-than-expected third-quarter profit and announcing a $500 million share buyback plan.

Declining issues outnumbered advancers for a 1.14-to-1 ratio on the NYSE and for a 1.01-to-1 ratio on the Nasdaq.

The S&P index recorded 14 new 52-week highs and two new lows, while the Nasdaq recorded 37 new highs and 59 new lows.

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U.S.-China trade optimism lifts Wall Street to record high


(Reuters) – Technology stocks pushed Wall Street’s three main indexes to record highs on Monday, as hopes of a U.S.-China trade deal and an improving domestic economy boosted risk appetite.

FILE PHOTO: A trader works on the floor at the New York Stock Exchange (NYSE) in New York, U.S., October 31, 2019. REUTERS/Brendan McDermid

Washington and Beijing said on Friday they had made progress in defusing an economically damaging trade war, with U.S. officials indicating that a deal could be signed this month.

Adding to the upbeat mood, Commerce Secretary Wilbur Ross said on Sunday licenses for U.S. companies to sell components to China’s Huawei Technologies Co would come “very shortly”.

Eight of the 11 major S&P 500 sectors were higher, with the energy sector .SPNY gaining the most as oil prices rose, while technology shares .SPLRCT provided the biggest boost on the back of a rally in trade-sensitive chip stocks.

The Philadelphia Semiconductor index .SOX touched a fresh record high, with the index last up 1.4%.

“There is growing enthusiasm over a trade deal, as progress is being made in these talks,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

“Investors are betting that some sort of a deal is on its way, not a whole deal but something that will at least avoid a recession. And markets can live with that,” he added.

The third-quarter earnings season has been a key driver for the markets, with 76% of the 360 S&P 500 companies that have reported results so far beating profit expectations, according to Refinitiv data.

Investors also took comfort from data on Friday that showed U.S. jobs growth slowed less than expected in October.

A report on Monday, however, showed new orders for U.S.-made goods fell more than expected in September and business spending on equipment was slightly weaker than initially thought, suggesting that manufacturing remains soft amid the ongoing trade war.

At 10:11 a.m. ET the Dow Jones Industrial Average .DJI was up 131.44 points, or 0.48%, at 27,478.80, the S&P 500 .SPX was up 13.58 points, or 0.44%, at 3,080.49 and the Nasdaq Composite .IXIC was up 44.55 points, or 0.53%, at 8,430.95.

The biggest drag on the blue-chip Dow Jones index was a 2.6% drop in shares of McDonald’s Corp (MCD.N) after the fast-food giant dismissed Chief Executive Steve Easterbrook over a recent consensual relationship with an employee, which the board determined violated company policy.

Under Armour Inc (UAA.N) fell 14.6% as it lowered its full-year revenue forecast for a second straight time, a day after it confirmed a federal probe related to its accounting practices.

In M&A activity, medical device maker Stryker Corp (SYK.N) said it would buy smaller rival Wright Medical Group (WMGI.O) for about $4 billion in cash. Shares in Wright Medical surged 29.6%, while Stryker fell 4.1%.

Advancing issues outnumbered decliners by a 2.10-to-1 ratio on the NYSE and by a 2.06-to-1 ratio on the Nasdaq.

The S&P index recorded 52 new 52-week highs and no new low, while the Nasdaq recorded 101 new highs and 13 new lows.

Reporting by Arjun Panchadar and Shreyashi Sanyal in Bengaluru; Editing by Anil D’Silva



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Boeing, J&J, dismal China data drag Wall Street lower


NEW YORK (Reuters) – Wall Street fell on Friday as negative headlines about Johnson & Johnson and Boeing, along with bleak economic data from China, soured investor risk appetite and offset generally positive corporate earnings.

All three major U.S. stock averages ended the session in the red, but the S&P 500 and the Nasdaq posted weekly gains. The blue-chip Dow was nominally lower than last week’s close.

Boeing Co (BA.N) and Johnson & Johnson (JNJ.N) shares led both the S&P 500’s and the Dow’s declines.

Boeing dropped 6.8% after Reuters reported that text messages between two employees suggested the planemaker misled the Federal Aviation Administration about the safety of the grounded 737 MAX aircraft.

Johnson & Johnson announced it would recall baby powder in the United States after regulators found trace amounts of asbestos in a sample, sending its shares falling 6.2%.

Growth of China’s gross domestic product slowed to its weakest pace in nearly 30 years as the bruising trade war with the United States took its toll, stoking fears of slowdown contagion.

The International Monetary Fund has lowered its forecast for global growth this year to 3%, which would mark the slowest expansion since the financial crisis.

“There’s no question that there’s signs out there that the economy is weakening,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

Today’s market weakness “has to do with (GDP) news out of China, Boeing and Johnson & Johnson,” Cardillo added, saying “market sentiment in terms of earnings is positive.”

Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., October 18, 2019. REUTERS/Brendan McDermid

Third-quarter earnings season has hit full stride, with 73 companies in the S&P 500 having reported. Of those, 83.6% have come in above average estimates, according to Refinitiv data.

Still, analysts currently see S&P 500 earnings dropping by 3.1% compared with last year, which would mark the first contraction since the earnings recession that ended mid-2016.

Schlumberger NV (SLB.N) gained 1.3% after the oilfield services company posted its largest quarterly loss ever as a result of a $12 billion charge as Chief Executive Olivier Le Peuch moved to shift focus toward software and services.

American Express Co (AXP.N) reported better-than-expected third-quarter profit as consumers boosted their spending. Still, the credit card issuer’s shares dipped 2.0%.

Coca-Cola Co’s (KO.N) revenue beat expectations and an upbeat forecast gave its shares a 1.8% boost.

Kansas City Southern (KSU.N) jumped 7.3% after the railroad operator also beat profit expectations, on increased petroleum shipments to Mexico.

Next week, market participants look forward to high profile results from Procter & Gamble Co (PG.N), United Parcel Service Inc (UPS.N) Caterpillar Inc (CAT.N), Boeing, Microsoft Corp (MSFT.O), Ford Motor Co (F.N), 3M Co (MMM.N), Twitter Inc (TWTR.N), Amazon.com (AMZN.O), and others.

The Dow Jones Industrial Average .DJI fell 255.68 points, or 0.95%, to 26,770.2, the S&P 500 .SPX lost 11.75 points, or 0.39%, to 2,986.2 and the Nasdaq Composite .IXIC dropped 67.31 points, or 0.83%, to 8,089.54.

Of the 11 major sectors in the S&P 500, seven closed in the red, with tech .SPLRCT, communications services .SPLRCL and industrials .SPLRCI suffering the biggest percentage declines.

Slideshow (2 Images)

Declining issues outnumbered advancing ones on the NYSE by a 1.03-to-1 ratio; on Nasdaq, a 1.41-to-1 ratio favored decliners.

The S&P 500 posted 29 new 52-week highs and two new lows; the Nasdaq Composite recorded 51 new highs and 59 new lows.

Volume on U.S. exchanges was 6.24 billion shares, compared with the 6.55 billion average over the last 20 trading days.

Reporting by Stephen Culp; Editing by Tom Brown



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Exclusive: Wall Street banks see green light from Fed on reserves


© Reuters. A Wall St. street sign is seen near the NYSE in New YorkNYSE in New York

By Matt Scuffham and Pete Schroeder

NEW YORK/WASHINGTON (Reuters) – Wall Street banks believe they are getting a green light from supervisors to hold more Treasury debt and less cash after last month’s volatility in overnight lending markets, three industry sources told Reuters.

That change could help boost liquidity in the overnight lending markets, because Treasury bonds are a common type of collateral pledged by companies and investors in exchange for cash.

Banks have complained for years that the U.S. Federal Reserve can be painfully prudent with its view that Treasury bonds are not the same as ordinary dollars when used as a liquidity buffer.

In recent weeks, they have intensified efforts to get Fed officials and examiners to soften their stance, and initial signs suggest the industry may finally be getting a warmer reception.

In private conversations with senior bankers, supervisors have attempted to make banks more comfortable with using excess reserves to lend in repo markets rather than hold onto more cash, sources familiar with the discussions said.

The Fed declined to comment on conversations with regulated entities.

Banks hold regular meetings with Fed supervisors, who provide broad guidance on how to interpret regulations but do not offer formal instructions, people familiar with the matter say. Rather than be prescriptive about how to manage reserves, supervisors identify shortcomings and provide general feedback on capital plans put forward by the institutions.

Bankers previously came out of that process understanding that the Fed preferred them to hold cash rather than Treasury bonds in times of stress, industry sources said. A struggling bank looking to offload large volumes of Treasury bonds may need to do so at a deep discount, which is a worry for regulators.

“Banks have been to some extent instructed by their supervisors, at least through the years, that there is a preference or even a requirement … that the banks hold high levels of excess reserves,” said Bill Nelson, a former senior Fed official who is now chief economist for the Bank Policy Institute, which lobbies for larger banks.

REPO MARKET UPHEAVAL

The tone taken by bank supervisors in private interactions with bank staff changed after chaos in the overnight lending market, known as “repo,” in September, one bank source said.

Rates for those loans suddenly spiked to 10% and the Fed had to step in to provide liquidity for the first time since the global financial crisis. The smooth functioning of those markets is critical to the financial system, providing banks with the short-term funding they need to trade and lend.

The Fed’s approach to regulation and supervision has relaxed since U.S. President Donald Trump appointed Randal Quarles as head of banking supervision two years ago. Quarles said the Fed was rethinking its position on reserves at a May 2018 conference, but bank sources said they did not experience any change in approach until recently.

U.S. lenders with more than $250 billion in assets are currently required to hold a large pool of high-quality, easily tradable assets that can cover cash outflows during times of extreme stress.

Banks can park those excess reserves at the Fed, either in idle cash or by buying Treasury bonds. Both are regarded as “high-quality, liquid assets” in formal regulatory requirements. However, many banks believed the Fed preferred cash over Treasuries, based on private supervisory feedback they received.

Some bankers, including JPMorgan Chase & Co (N:) Chief Executive Jamie Dimon, say that prevents them from easing stress in repo markets.

This month, Reuters reported that changes to JPMorgan’s $2.7 trillion balance sheet, which saw the bank reduce the cash it had on deposit at the Fed by 57% through June, were a factor in the repo spike.

Speaking to reporters after JPMorgan reported third-quarter results on Tuesday, Dimon said he would have happily provided more overnight loans when rates spiked because it would have generated better profits than leaving cash at the Fed. But, in his view, regulatory constraints prevented JPMorgan from doing so.

“We have $125 billion in that checking account today. I would be happy to move all of it into repo, but we can’t because of regulations,” he said.



Wall Street slips as weak economic data offsets earnings strength


NEW YORK (Reuters) – Wall Street lost ground on Wednesday as weak U.S. economic data and simmering geopolitical tensions spooked buyers away from the equities market, despite a string of generally positive third-quarter earnings reports.

FILE PHOTO: Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., September 18, 2019. REUTERS/Brendan McDermid

Technology shares, led by Microsoft Inc (MSFT.O), weighed heaviest, pulling all three major U.S. stock averages into the red.

U.S. retail sales contracted in September for the first time in seven months, according to the Commerce Department, in a sign that cracks might be spreading from the troubled manufacturing sector to the broader economy.

“This is perhaps the first indication that the consumer side of the economy is showing signs of stress and perhaps pulling back,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York. “The consumer has been looked at as the savior of this economy and this data comes out and it’s rather shocking.”

U.S.-China trade uncertainties increased after the U.S. House of Representatives riled Beijing by passing pro-democracy legislation in support of Hong Kong.

President Donald Trump said he would probably not sign any trade deal before he meets with Chinese President Xi Jinping at the upcoming APEC Forum in Chile, but said a partial trade deal was being formalized.

“It surprises us that the market isn’t reacting more to the negative issues,” Ghriskey added. “Part of that is the expectation that the Fed is going to lower rates at the end of October and that companies may surprise to the upside like they did in first second quarters.”

Analysts currently expect S&P 500 third-quarter earnings to fall by 3%, which would mark the first year-on-year contraction since the earnings recession that ended in 2016.

However, of the 43 S&P 500 companies to have posted third-quarter results so far, 86% have beaten expectations.

Bank of America (BAC.N) rose 1.5% after posting its third-quarter profit beat due to growth in advisory fees and loan book expansion.

United Airlines (UAL.O) advanced 1.9% after the airline beat quarterly profit estimates and increased its 2019 guidance.

The Dow Jones Industrial Average .DJI fell 22.82 points, or 0.08%, to 27,001.98, the S&P 500 .SPX lost 5.99 points, or 0.20%, to 2,989.69 and the Nasdaq Composite .IXIC dropped 24.52 points, or 0.3%, to 8,124.18.

Of the 11 major sectors in the S&P 500, six closed in negative territory, with energy .SPNY and tech .SPLRCT suffering the largest percentage losses.

In other stocks news, Eli Lilly & Co (LLY.N) dropped 1.6% in the wake of a late-stage study that showed its experimental pancreatic cancer treatment failed to meet the overall survival goal.

Drug distributors McKesson (MCK.N), AmerisourceBergen (ABC.N) and Cardinal Health (CAH.N) rose between 2% and 5% following a report that they were in talks with state and local governments to settle thousands of opioid lawsuits for $18 billion.

General Motors (GM.N) gained 1.1% after the automaker reached a tentative labor deal with the United Auto Workers union.

Netflix Inc (NFLX.O) shares jumped more than 10% in post-market trading after posting quarterly results.

Advancing issues outnumbered declining ones on the NYSE by a 1.08-to-1 ratio; on Nasdaq, a 1.07-to-1 ratio favored advancers.

The S&P 500 posted 17 new 52-week highs and no new lows; the Nasdaq Composite recorded 35 new highs and 62 new lows.

Volume on U.S. exchanges was 6.06 billion shares, compared with the 6.79 billion average over the last 20 trading days.

Reporting by Stephen Culp in New York; Editing by Matthew Lewis



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Wall Street on edge after Hong Kong protests bill


(Reuters) – Wall Street inched lower on Wednesday, as a congressional bill related to the Hong Kong protests stoked fears of more friction with China, even as another round of positive earnings reports underlined a solid start to third-quarter results.

FILE PHOTO: Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., September 18, 2019. REUTERS/Brendan McDermid

Bank of America (BAC.N) rose 2.2% after beating analysts’ estimates for third-quarter profit as the second-largest U.S. bank by assets earned more in advisory fees and grew its loan book.

PNC Financial Services Group Inc (PNC.N) and Bank of New York Mellon Corp (BK.N) also rose after better-than-expected earnings.

The reports followed robust results on Tuesday from JPMorgan Chase & Co (JPM.N) and Citigroup Inc (C.N), showing consumer confidence remained strong despite recession fears that have led businesses to pull back on spending and borrowing.

“We had a pretty good celebration yesterday after the first busy day of earnings and we got another busy day today, so I think that the path of least resistance is a little bit lower today,” said Art Hogan, chief market strategist at National Securities in New York.

The S&P 500 bank sector .SPXBK gained 0.4% after hitting a one-year high on Tuesday.

Analysts have forecast the worst quarterly earnings season in nearly three years for S&P 500 companies, as domestic economic growth shows signs of slowing on the fallout from the tariff war with China.

The U.S. House of Representatives on Tuesday passed legislation related to pro-democracy protests in Hong Kong. In response, China warned that bilateral relations would be damaged if the measures became law.

Conflicting reports on an orderly exit for Britain from the European Union also added to the mix.

But analysts project market action to turn positive through the session, as optimism from solid earnings reports overshadows mixed political headlines.

Early action showed advancing issues outnumbered decliners by a 1.02-to-1 ratio on the NYSE and by a 1.09-to-1 ratio on the Nasdaq.

At 10:01 a.m. ET the Dow Jones Industrial Average .DJI was down 57.19 points, or 0.21 percent, at 26,967.61, the S&P 500 .SPX was down 7.62 points, or 0.25 percent, at 2,988.06 and the Nasdaq Composite .IXIC was down 36.04 points, or 0.44 percent, at 8,112.66.

United Airlines (UAL.O) was up 1.2% after beating analyst estimates for quarterly profit, and increased its 2019 profit target.

Abbott Laboratories (ABT.N) fell 1.8% after the medical device maker trimmed the upper end of its full-year earnings forecast and missed quarterly revenue estimates.

Its results were in sharp contrast to Johnson & Johnson (JNJ.N) and UnitedHealth Group Inc (UNH.N) on Tuesday.

Adobe Inc (ADBE.O) fell 3.8% after Citigroup downgraded the photoshop software maker’s stock. It was among the biggest drags on the tech sector.

Tech heavyweights Netflix Inc (NFLX.O) and International Business Machines (IBM.N) are due to report later on Wednesday.

McKesson (MCK.N), AmerisourceBergen (ABC.N) and Cardinal Health (CAH.N) jumped between 5% and 6% after a report that the drug distributors were in talks with state and local governments to settle thousands of opioid lawsuits for $18 billion.

Data on Wednesday showed a fall in U.S. retail sales for the first time in seven months in September.

The S&P index recorded five new 52-week highs and no new low, while the Nasdaq recorded 13 new highs and 36 new lows.

Reporting by Shreyashi Sanyal and Arjun Panchadar in Bengaluru; Editing by Bernard Orr



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Wall Street Week Ahead: Bruised U.S. banks expected to report third quarter earnings decline


NEW YORK (Reuters) – The biggest U.S. banks are expected to kick off the earnings season on a sour note next week due to falling interest rates, which may have pressured net interest margins enough to cause the sector’s first year-over-year earnings per share decline in three years.

While strength in mortgage banking and cheap valuations could provide support to the S&P 500 bank index .SPXBK, its performance depends on what reassurance executives provide on credit conditions, the outlook for loan growth and their ability to reduce deposit costs during their conference calls.

Tuesday brings third quarter profit reports from Citigroup Inc (C.N), Wells Fargo and Co (WFC.N), JPMorgan Chase & Co (JPM.N), and Goldman Sachs (GS.N). Bank of America (BAC.N) reports on Wednesday.

The biggest U.S. banks will report a 1.2% decline in third-quarter earnings, while revenue is seen rising 0.9%, according to data aggregated by Refinitiv analyst David Aurelio. This would be the first profit decline since the same quarter in 2016, according to data from Factset.

“Overall it’s shaping up to be a pretty challenging quarter because of the net interest rate environment,” said Fred Cannon, director of research for Keefe, Bruyette & Woods in New York, citing the flattening and temporary inversion of the U.S. Treasury 2-year/10-year yield curve during the quarter.

Bank profits depend heavily on net interest income, or the difference between the rate they charge for long-term loans and the rate they pay for short-term borrowing.

Executives from Citi, Wells Fargo and JPMorgan all cut their full-year forecasts for net interest income last month, citing macroeconomic concerns.

Part of the problem is U.S. Federal Reserve interest rate cuts in July and September. And futures traders are betting on more Fed rate cuts going forward, including one in October.

As a result, bank investors will listen for executive reassurance on the net interest margin outlook and their ability to mitigate weakness, said Manulife Investment Management’s Lisa Welch, who manages the John Hancock Regional Bank Fund.

One offset to lower lending profits would be a reduction in interest rates banks pay their customers for deposits, as those rates rose while the Fed was hiking interest rates.

“There’s going to be a lot of questions on how fast banks are able to bring down their deposit costs as loan yields are coming down,” said Welch, adding that she does not expect deposit costs “to come down as quickly as loan yields have fallen.”

Mortgages may be another silver lining to lower rates in third-quarter numbers and future quarters as borrowers avail of cheaper rates. Refinancing, which accounts for most mortgage applications, has more than doubled from a year ago, according to Mortgage Bankers Association data released on Wednesday.

“With rates being lower, we think mortgage activity will be very strong,” said Welch, pointing to First Horizon (FHN.N) as one bank that could benefit from mortgage demand.

Bank of America and Wells Fargo should also benefit, according to KBW’s Cannon. To cope with rising demand, Wells Fargo is boosting its mortgage team, according to a memo seen by Reuters this week.

But investors will also be on high alert for signs slowing U.S. economic growth is hurting debt repayments, said Mike Cronin, investment manager at Aberdeen Standard Investments.

“Given that we’ve had some economic data that’s been a little weaker is there any trend in credit costs that raises concerns going into 2020?” said Cronin.

So far, strong credit quality and bank balance sheets have reassured KBW’s Cannon, who is neutral on the sector. “But if we start to see meaningful credit deterioration that would change our minds about how we think about the banks,” he said.

Cannon did not recommend buying banks going into earnings season due to the likelihood “consensus estimates come down in the quarter.” But on the plus side, he said, valuations do seem to reflect an expectation for further weakness.

(GRAPHIC – S&P bank index valuation vs S&P 500: here)

The S&P Bank index has gained 14% year-to-date, compared with a 16.5% advance for the S&P 500. But the sector’s trading multiple of 10.2 times earnings estimates for the next 12 months compares well to its historical average of 12.6 and the benchmark S&P’s current trading multiple of 16.4.

Bank valuations look attractive to Manulife’s Welch, who does not expect a recession any time soon.

FILE PHOTO: Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., October 9, 2019. REUTERS/Brendan McDermid

“If we’re wrong and go into a mild recession we think the banks will hold up much better” than going into financial crisis, she said, citing underwriting improvements.

But, after a spate of weak manufacturing data, Aberdeen Standard’s Cronin is looking for data to stabilize before recommending the sector.

“There is a lot of downside priced into the stocks but overall I’d still say I’m not really positive on the group just yet,” he said.

Reporting by Sinéad Carew with additional reporting from Imani Moise and Elizabeth Dilts Marshall; Editing by Alden Bentley and Rosalba O’Brien



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Wall Street Surges on Hope of Trade War De-escalation  By Investing.com



Investing.com – Wall Street rose for the third straight session on Friday, as investors were buoyed by hope that the trade talks between the U.S. and China will result in at least a partial deal to de-escalate the current stand-off between the two.

The rose 357 points or 1.4% by 9:48 AM ET (13:48 GMT), while the S&P 500 was up 39 points or 1.3% and the gained 118 points or 1.5%.

U.S. President Donald Trump told reporters on Thursday that talks between the two countries were going “really well,” which followed a tweet that he will meet with Chinese Vice Premier Liu He on Friday.

Trump again talked up market hopes early on Friday.

U.S. President Donald Trump told reporters on Thursday that talks between the two countries were going “really well,” which followed a tweet that he will meet with Chinese Vice Premier Lui He on Friday.

“It is still going to be a one step forward, two steps backward tone with the talks, but there are hopes of a de-escalation, “said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

Companies with exposure to China were higher, with Apple (NASDAQ:) up 1.3%, NVIDIA (NASDAQ:) gaining 3.3% and Intel (NASDAQ:) rising 2.3%. Tesla (NASDAQ:) surged 1.5%, while Slack gained 5% after it said its active daily users rose by 37% in September from a year ago.

Meanwhile oil companies were up after a report of attacks on an Iranian oil tanker caused futures to surge. Exxon Mobil (NYSE:) and Chevron (NYSE:) were both up 1%.

In commodities, the , which measures the greenback against a basket of six major currencies, was down 0.5% to 97.928 and tumbled 0.8% to $1,488.80 a troy ounce. jumped 1% to $54.05 a barrel.

-Reuters contributed to this report

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Wall Street dips at open as caution sets in ahead of trade talks


FILE PHOTO: A trader walks past a board showing the final trading numbers on the floor of the New York Stock Exchange shortly after the closing bell in New York, U.S., October 2, 2019. REUTERS/Lucas Jackson

(Reuters) – U.S. stocks opened slightly lower on Monday as investors braced for U.S.-China trade talks later in the week, after a rollercoaster start to the month on fears that the world’s largest economy could be sliding into a recession.

The Dow Jones Industrial Average .DJI fell 71.39 points, or 0.27%, at the open to 26,502.33. The S&P 500 .SPX opened lower by 7.78 points, or 0.26%, at 2,944.23. The Nasdaq Composite .IXIC dropped 26.07 points, or 0.33%, to 7,956.41 at the opening bell.

Reporting by Shreyashi Sanyal in Bengaluru; Editing by Sriraj Kalluvila



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