Market Snapshot* DJIA
18481.48
-65.81
5217.69
-42.37
S&P 500
2175.44
-11.45
10-Year
1.5569%
-1/32
Nasdaq
Wednesday, August 24, 2016
30-Year
2.2424%
-7/32
Euro
$1.12635
-0.0039
$46.77
-1.33
Nymex Crude Source: SIX Telekurs, ICAP plc
Stocks
Tomorrow’s Headlines
U.S. stocks slipped in quiet trade Wednesday, while the price of oil took a fresh fall. Analysts are divided on the significance of recent market moves. "People see new highs and they automatically assume the market is going to collapse," said Craig Hodges, chief executive of Dallas-based Hodges Capital Management. "No one wants to be in the market, they don't trust the market. To me we are in a bull market and no one realizes it."
US Criticizes EU On Corporate Tax Probes The U.S. Treasury Department released a sharp critique of the European Commission’s investigation of corporate tax breaks as EU officials near the end of their inquiry into Apple Inc.’s arrangements with Ireland. In a 25-page paper released Wednesday, the Treasury elaborated on arguments it has been making all year. The U.S. contends that the EU has made an “unforeseeable departure from the status quo” and is acting inconsistent with international tax norms.
Treasurys U.S. government bonds were little changed Wednesday morning, with many investors sitting on their hands ahead of Federal Reserve Chairwoman Janet Yellen's remarks on Friday.
Forex The dollar rose against a basket of currencies on Wednesday, buoyed by U.S. economic data and an uptick in expectations for a hawkish monetary-policy message from the Federal Reserve later this week.
“The Commission is charting a course that sets aside years of multilateral efforts” on tax avoidance, Treasury wrote. “The Commission’s path runs the risk of the EU being perceived as having used its unique structure to undermine and reverse international progress.” EU officials have said repeatedly that they are merely following their own laws against unfair competition, which require them to recover improper “state aid” to companies in the form of selective tax breaks provided by EU member countries. Treasury’s statements came as Apple awaits a decision in the probe of its tax affairs in Ireland. Irish Finance Minister Michael Noonan has said he expects a ruling in September or October. continued on page 2
Tomorrow’s Calendar 8:30 a.m.
Jul Advance Report on Durable Goods Durable Goods-SA, M/M% (expected +3.2%), Dur Goods, Ex-Defense, M/M% (previous -3.9%), Dur Goods, Ex-Transport, M/M% (previous -0.5%), Orders: Cap Gds, Non-Def, Ex-Air, M/M% (previous +0.2%), Shipmnts: Cap Gds, Non-Def, Ex-Air, M/M% (previous -0.4%)
8:30 a.m.
08/20 Unemployment Insurance Weekly Claims Report - Initial Claims Jobless Claims (expected 265K), Net Chg (previous -4K), Continuing Claims (previous 2175000), Net Chg (previous +15K)
8:30 a.m.
U.S. Weekly Export Sales Corn (Metric Tons) (previous 851.4K), Soybeans (Metric Tons) (previous 1326.6K), Wheat (Metric Tons) (previous 478K)
9:45 a.m.
Bloomberg Consumer Comfort Index
9:45 a.m.
Aug US Flash Services PMI (expected 51.2)
10:30 a.m.
08/19 EIA Weekly Natural Gas Storage Report Working Gas In Storage (Cbf) (previous 3339B), Net Chg (Cbf) (previous +22B)
11:00 a.m.
Aug Federal Reserve Bank of Kansas City Survey of Tenth District Manufacturing Mfg Activity Idx (previous -15), 6-Mo Exp Prod Idx (previous 25), Mfg Composite Idx (previous -6), 6-Mo Exp Composite Idx (previous 14)
4:30 p.m.
Foreign Central Bank Holdings
4:30 p.m.
Federal Discount Window Borrowings
4:30 p.m.
Money Stock Measures
Commodities Oil prices slid Wednesday after weekly inventory data showed U.S. stockpiles of crude oil and petroleum products at a record high.
*preliminary values subject to adjustments
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Wednesday, August 24, 2016 4 p.m. ET
Tomorrow’s Headlines continued
Earlier Wednesday, she told reporters in Rome: “There are people still under the rubble, so we fear that this number could rise further.”
Pfizer Buys Part of AstraZeneca’s Antibiotics Business
JPMorgan Creates Executive Role to Lead Cloud Services
Pfizer Inc. has agreed to buy part of AstraZeneca PLC’s antibiotics business for up to $1.575 billion plus royalties in a move the U.S. company said would boost the stable of older products it sells, some of which have lost patent protection. Under the terms of the deal Pfizer will pay Astra $550 million upfront plus an unconditional $175 million in January 2019. Then, depending on the progress and commercial success of the drugs in question, it will pay a further $850 million plus royalties. The deal involves three approved antibiotics and two drugs in clinical trials. It will give Pfizer the right to sell those drugs in most markets outside the U.S. and Canada. Allergan PLC holds the North American rights to four of the drugs. For the fifth drug, Merem, Pfizer will get the North American rights. It doesn’t involve Astra’s portfolio of biological anti-infective drugs, or the business it spun out last year to focus on the development of early-stage antibiotics.
Existing-Home Sales Fall for 1st Time Since February Sales of previously owned homes slipped in July, a sign the U.S. housing-market recovery could be uneven as limited inventory and rising prices put purchases out of reach for some Americans. The pace of existing home sales decreased 3.2% last month from June to a seasonally adjusted rate of 5.39 million, the National Association of Realtors said Wednesday. It was the first time sales had decreased since February. Economists surveyed by The Wall Street Journal had expected a July sales pace of 5.52 million. Sales for June were unrevised at 5.57 million, the highest annual rate of the expansion.
Earthquake Hits Central Italy, Killing Over 100 A 6.2-magnitude earthquake struck central Italy early Wednesday, killing 120 people and leaving many trapped beneath the rubble of buildings that collapsed while they slept. Italian soldiers and emergency crews were aiding the injured and searching for survivors in the hardest-hit towns of Amatrice, Pescara del Tronto and Accumoli, located close to the epicenter. “The center of Amatrice is completely destroyed,” Nicola Zingaretti, president of the Lazio region, told Italian television. Aerial photos showed that the town was virtually flattened. Immacolata Postiglione, head of emergency services for Italy’s Civil Protection Agency, confirmed the death toll.
J.P. Morgan Chase & Co. is reaching further into the cloud, using the technology to cut costs and boost efficiencies. The largest U.S. bank by assets named an executive who is tasked with running the bank’s cloud services, creating a position to oversee the technology, according to a Wednesday internal bank memo reviewed by The Wall Street Journal. Harish Grama joins the bank next week as chief information officer for cloud services. He previously worked at IBM, where he spent the last 20 years in different technology software development roles, including most recently head of software development for IBM’s cloud unit, according to the memo.
US Regulators Step Up Scrutiny Around Swift U.S. banking regulators are ramping up oversight around financial messaging system Swift, a key intermediary in global payments that faces greater scrutiny following a rash of cyberattacks on its users. The Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have told their examiners to look more closely at the security of banks’ links to the Swift network. The Fed, which is part of a panel of central banks tasked with overseeing Belgium-based Swift, also said it is actively monitoring Swift’s own response to the cyberattacks, which have led to the theft of tens of millions of dollars from banks in Bangladesh and Ecuador. The steps were disclosed in a letter, reviewed by The Wall Street Journal, that the regulators sent Aug. 17 to Rep. Carolyn B. Maloney (D., N.Y.). The letter was signed by Fed Chairwoman Janet Yellen, Comptroller of the Currency Thomas Curry and FDIC Chairman Martin Gruenberg.
Fed’s Kaplan Says Rate Rise Is Getting Closer Federal Reserve Bank of Dallas President Robert Kaplan said in an interview published Wednesday that he expects the U.S. central bank to raise rates this year. Speaking in the Nikkei Asian Review, Mr. Kaplan said that if the U.S. grows at around 2% and sees declining unemployment levels, “I believe that removal of some amount of accommodation is appropriate.” As to when and how much, Mr. Kaplan said he would “avoid speculating” in favor of waiting to see how the data perform. But the next increase in what’s now a 0.25% to 0.50% overnight target rate may be getting closer, Mr. Kaplan hinted. “I believe we’re approaching...a point at which removing some amount of accommodation will be appropriate.”
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continued on page 3
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Wednesday, August 24, 2016 4 p.m. ET
Tomorrow’s Headlines continued
said it was on track to continue reducing debt through a combination of asset sales, cost cuts and a bounce in commodity prices.
American University of Afghanistan Attacked
Hong Kong Regulator Fines Morgan Stanley $2.4M
KABUL—Militants launched an attack on the American University of Afghanistan in Kabul during evening classes Wednesday, wounding at least 14 people as panicked students and staff fled.
Hong Kong’s securities regulator on Wednesday fined and publicly reprimanded an Asian unit of Morgan Stanley for the failure of its internal controls related to trading, among other things.
The attack was ongoing after an unknown number of assailants stormed the campus, according to Afghanistan’s Interior Ministry and witnesses. Afghan security forces were at the scene.
The Securities and Futures Commission fined Morgan Stanley Hong Kong Securities Ltd. 18.5 million Hong Kong dollars (US$2.4 million) for the misconduct, which it said took place between 2013 and 2016.
No one immediately claimed responsibility, but the heavilyfortified university has long been at high risk of attack from Taliban militants because of its association with foreigners.
The regulator said the unit didn’t separate certain types of trading that could have presented a conflict of interest; failed to have “sufficiently comprehensive” documentation of its electronic trading systems; and also failed to follow instructions from certain clients regarding their positions.
The attack wounded one woman and 13 men, said a spokesman for the ministry of health, with ambulances on standby outside the campus waiting for the all-clear from Afghan security forces. A hospital operated by the Italian nongovernmental aid group Emergency said it had received five of the wounded.
Bed Bath & Beyond to Audit Egyptian Cotton Supplier Bed Bath & Beyond Inc. said Wednesday it had started an audit to determine if an Indian supplier had sold it authentic Egyptian-cotton products, days after Target Corp. alleged the same vendor had sold it fraudulent Egyptian-cotton sheets. Bed Bath & Beyond becomes the third American retailer, after Wal-Mart Stores Inc. and J.C. Penney & Co., to open an investigation into Welspun India Ltd. this week. The Indian company is under fire for allegedly shipping sheets labeled as made with Egyptian cotton to the U.S. when they were made using another source of cotton. While Welspun has reaffirmed products in Bed Bath & Beyond’s stores are made with Egyptian cotton, Bed Bath & Beyond said it has “engaged an independent third party to perform an audit of the supply chain to confirm this information. We will aggressively pursue our investigation and take appropriate action, if needed.”
Glencore Reports Narrower Loss, Cuts Debt A rebound in commodity prices and big cost reductions weren’t enough to pull Glencore PLC out of the red in the first half of the year. On Wednesday, the world’s No. 3 diversified miner by market value reported a $369 million net loss for the six months through June, compared with a $676 million net loss a year earlier. In Glencore’s first half-year report since it embarked on a sweeping effort to repair its balance sheet, the company
Express Cuts Guidance as Sales Declines Express Inc. again slashed its profit forecast for the year as the apparel chain reported sliding sales in the latest quarter, hurt by dwindling store traffic and online sales. The muted results missed the company’s already-downbeat expectations, and shares tumbled 25% to $12 in premarket trading. The company said same-store sales, a measure that excludes recently closed or opened stores and includes online sales, fell 8%. Analysts polled by Consensus Metrix projected a 4.7% decline, given the company’s guidance for same-store sales to fall by mid-single digits. Retailers throughout the country, from department stores and specialty shops to Target Corp., have been reporting sliding sales due in large part to falling foot traffic as shoppers increasingly turn to Amazon.com Inc. and fast-fashion options such as Hennes & Mauritz AB.
SEC Settles With 71 Muni Borrowers Over Disclosure Problems Dozens of state and municipal bond issuers agreed to put in more stringent disclosure policies as part of an agreement reached with the Securities and Exchange Commission Wednesday. The 71 municipal borrowers, which range from Minnesota and Hawaii to Ohio State University, won’t pay fines. Instead, they agreed to put in place training and better policies to improve the information they release to current and prospective bondholders, the SEC said. Wednesday’s action “puts teeth behind the SEC’s objective to make sure that all material information is disclosed in a timely manner,” said Richard Ciccarone, president and CEO of Hiawatha, Iowa-based Merritt Research Services.
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Wednesday, August 24, 2016 4 p.m. ET Copyright Dow Jones & Co., Inc.
Talking Points
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Central Banker Confab Asks: What Are We Doing Here?
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When central bankers gather this week in Jackson Hole, Wyo., they will be consumed not with some pressing crisis in the global economy but by an existential threat to their relevance. The threat stems from the realization that the sluggish economic growth that has prevailed since 2009 may be here to stay. If so, then so are today’s low interest rates. Central banks set interest rates to balance investment and savings and thus keep economies fully employed and inflation stable. The interest rate that achieves that balance is called the natural rate. The fact that inflation and growth are now so sluggish despite ultra-easy monetary policy shows that the natural rate has fallen—by 1 to 2.5 percentage points since 2007 in the U.S., Canada, Britain and the eurozone, according to a recent Fed study. Fed policy makers think the U.S. natural rate is 3%, down from 4.5% before the recession. That’s 1.5 percentage points less ammunition to counteract the next shock to the economy. Initially, central bankers thought the drop in the natural rate was transitory as households, businesses and governments tried to pay down debt or borrow less. With time, it has become clear more deep-seated forces are at play: A slump in productivity growth has depressed the return on, and demand for, new equipment. An aging population needs fewer malls, office buildings and houses. Rising inequality has tilted more income toward the high-saving rich. Risk aversion world-wide has heightened the demand for safe government bonds. In dealing with this new normal, policy makers are considering three possible responses, all of which have drawbacks. Accept the status quo: The growth slowdown may not be permanent. Or, the economy may have changed in ways that make future recessions less severe: For example, housing is less important and inflation is better anchored. And the Fed has ammunition beyond just short-term rates. In a recent paper, David Reifschneider, a Fed economist, calculates that the unconventional tools the Fed has employed in recent years, such as buying government bonds by creating money or committing to keep rates at zero, can make up for the inability of rates to go much below zero. Still, this is hardly ideal. Another round of bond buying would further expand the Fed’s share of publicly held federal debt, now at 18%. Critics think this may give fiscal considerations too much sway in monetary policy. More worrisome, these less orthodox steps can incentivize speculative excesses, as even advocates of the policies acknowledge. “Does a low-rate...environment that lasts for a long time create conditions that might pose risks to financial stability?...I think the answer is probably yes,” Fed governor Dan Tarullo said last month. Fix underlying growth: Former Treasury Secretary Larry Summers, now at Harvard University, has been the most vocal advocate of curing slow growth directly with deficit-financed government infrastructure. This would both raise public investment and, by easing bottlenecks, incentivize private investment as well. The Fed would have no direct role in this. It could, however, team up with the Treasury by promising to buy the bonds that finance the infrastructure, a largely untried form of stimulus dubbed “helicopter money.” But central bankers are nervous about coordinating with politicians. Even ordinary deficit financing has proven unpopular with debt-wary governments. For maximum effect, all countries would have to expand their deficits. If only the U.S. did, it would push up interest rates and the dollar, sucking in imports and thus diluting the benefit. continued on page 5 Copyright © Dow Jones & Company, Inc. All Rights Reserved. www.dowjones.com
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Wednesday, August 24, 2016 4 p.m. ET
Talking Points
Dow executives haven’t made a secret of their desire to execute that conversion and to shut off the dividend spigot—and Mr. Buffett, conversely, wants to avoid the evaporation of those dividends.
continued
Dow Chemical Nears Costly Trigger For Berkshire The Dow Jones Industrial Average’s recent rise has lifted many stocks in Berkshire Hathaway Inc.’s portfolio. But Berkshire chief executive Warren Buffett is probably less thrilled with the rally in another Dow. Shares of Dow Chemical Co. have spent much of the past month hovering above $53—perilously close to a level that would cause Berkshire to lose a $255 million-a-year income stream. Since 2009, when Berkshire lent Dow Chemical $3 billion to help finance its purchase of Rohm & Haas, Dow has been on the hook for paying an 8.5% annual dividend on three million shares of preferred stock. Those shares have resulted in more than $1.5 billion for Berkshire. As Mr. Buffett likes to say, that amounts to $8 a second. But the agreement has an escape hatch. If Dow’s shares exceed $53.72 for at least 20 trading days in a 30-day period, the chemical company can convert Berkshire’s preferred shares into common stock, which doesn’t pay out special dividends. Kuwait’s sovereign-wealth fund also lent Dow $1 billion under the same terms.
That has fueled speculation among some bankers and investors that Mr. Buffett or Berkshire are shorting Dow’s shares as a way to exert downward pressure on the stock and avoid triggering the conversion. Mr. Buffett declined to comment on whether he or his company have been shorting the shares. “We have no knowledge or facts to support the position that it is directly Berkshire Hathaway” shorting Dow’s shares, said Dow spokeswoman Rebecca Bentley. The 2009 preferred-stock agreement had barred Berkshire from shorting Dow shares until April 2014. Since then, Dow’s stock has repeatedly flirted with that magic $53.72 level, and occasionally breached it, only to quickly retreat. Propelled in part by Dow’s pending deal to merge with DuPont Co., the shares peaked last year above $57 before rapidly declining to the low $50s. The shares were trading at $53.72 midday Wednesday in New York. Although short interest in Dow, or the amount of shares of Dow stock that are sold short, is down for the year and dropped to $600 million at the end of July, short sellers have increased their positions by almost $100 million in August, up 16%, said Ihor Dusaniwsky, head of research at S3 Partners, a financial analytics firm.
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