VW could face recall of more cars over emissions: report

BERLIN (Reuters) – Germany’s Federal Motor Transport Authority (KBA) is considering recalling more Volkswagen (VOWG_p.DE) cars due to its emissions, scandal, the Bild am Sonntag newspaper reported on Sunday.

The KBA has opened an investigation into whether a software update for 1.2-litre engine cars, including the popular Polo, enabled them to cheat emissions tests, the newspaper said, without naming its sources.

The Bild am Sonntag said prosecutors were preparing charges against unnamed Volkswagen managers for suspected fraud, noting that the company had given assurances in 2016 that the 1.2 liter engines did not use illegal emissions cheating defeat devices.

VW has had to recall hundreds of thousands of cars around the world since it admitted in Sept. 2015 to installing illegal software in diesel engines to cheat strict U.S. anti-pollution tests.

The KBA was considering forcing 30,000 affected cars in Germany off the road, although it was more likely just to order further remedial work, the newspaper said. There are 370,000 of the models under investigation in Europe in total.

Germany’s Transport Ministry, which oversees the KBA, said it was aware of the allegations, but noted that the KBA’s investigation was not yet concluded.

A Volkswagen spokesman said internal quality controls for diesel cars with 1.2 liter engines, model EA189, had revealed irregularities which were now being analyzed.

He said Volkswagen had informed the authorities and the company was in continuous dialogue with them.

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Israel UAV maker Aeronautics gets 850 million shekel buyout offer

JERUSALEM (Reuters) – Israeli unmanned aerial vehicle maker Aeronautics (ARCS.TA) said on Sunday it received an offer to be acquired by state-owned Rafael Advanced Defense Systems and businessman Avihai Stolero for 850 million shekels ($232 million).

Aeronautics, which has a market value of 507 million shekels, said the offer for all its shares would be done as a reverse merger executed through a company jointly owned by Rafael and Stolero.

Aeronautics would become private and its shares delisted from the Tel Aviv Stock Exchange.

Negotiations will take place until Feb. 15. In the meantime, Rafael will conduct its due diligence.

Last August, Aeronautics rejected a 430 million shekel acquisition from Rafael and Stolero.

Earlier this month, state-owned Israel Aerospace Industries [ISRAI.UL] said it was in early talks to invest in Aeronautics.

Aeronautics manufactures unmanned aerial vehicles for military surveillance and defense purposes, as well as for the commercial sector.

($1 = 3.6699 shekels)

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Saudi Aramco's bond will probably be in 10 billion range: energy minister

ABU DHABI (Reuters) – Saudi Aramco will issue bonds which will probably be in the 10 billion range, Saudi Arabia’s energy minister said on Sunday.

Khalid al-Falih, speaking at a conference in Abu Dhabi, did not specify the currency of the planned debt issuance but last week he said at an event in Riyadh that the bonds – which would be Aramco’s debut in the international debt markets – are likely to be denominated in U.S. dollars.

The Saudi oil giant will issue the bonds in the second quarter of this year, he said last week.

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SpaceX to lay off 10 percent of workforce

(Reuters) – Elon Musk’s rocket company SpaceX will reduce its workforce by about 10 percent of the company’s more than 6,000 employees, it said on Friday.

The company said it will “part ways” with some of its manpower, citing “extraordinarily difficult challenges ahead.”

“To continue delivering for our customers and to succeed in developing interplanetary spacecraft and a global space-based Internet, SpaceX must become a leaner company. Either of these developments, even when attempted separately, have bankrupted other organizations”, a spokesman said in an email.

In June, Elon Musk fired at least seven people in the senior management team leading a SpaceX satellite launch project, Reuters reported in November. The firings were related to disagreements over the pace at which the team was developing and testing its Starlink satellites.

SpaceX’s Starlink program is competing with OneWeb and Canada’s Telesat to be the first to market with a new satellite-based internet service.

The management shakeup involved Musk bringing in new managers from SpaceX headquarters in California to replace a number of the managers he fired in Seattle.

Last month, SpaceX launched its first U.S. national security space mission, when a SpaceX rocket carrying a U.S. military navigation satellite blasted off from Florida’s Cape Canaveral.

In December, the Wall Street Journal reported that SpaceX was raising $500 million, taking its valuation to $30.5 billion.

The Hawthorne, California-based company had earlier outlined plans for a trip to Mars in 2022, to be followed by a manned mission to the red planet by 2024.

Another Elon Musk company, electric car maker Tesla Inc, said in June it was cutting 9 percent of its workforce by removing several thousand jobs across the company in cost reduction measures.

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Buyer keen to acquire Mercure, Novotel hotels for $950m

Property developer Oxley Holdings has accepted a letter of intent for the purchase of its Mercure and Novotel hotels in Stevens Road for $950 million.

It was not announced who the buyer was.

The letter of intent is non-binding and is subject to the parties entering into a definitive sale and purchase agreement, Oxley said in an announcement late yesterday evening.

The consideration was agreed on a “willing buyer-willing seller” basis, taking into account the prevailing market conditions.

Under the terms of the letter of intent, upon receipt of the sum of $9.5 million as a non-refundable deposit, the buyer will be entitled to carry out due diligence during the period until April 15 this year.

The buyer will then pay a sum of $38 million on Feb 28, and a further sum of $47.5 million on the signing date of the definitive sale and purchase agreement or April 15, whichever is earlier.

The two hotels, which opened in 2017, were Oxley’s maiden venture into the hospitality business.

Strategically located near the Scotts Road and Orchard Road shopping belts, Novotel Singapore on Stevens has 254 rooms… Mercure Singapore on Stevens has 518 rooms.

Strategically located near the Scotts Road and Orchard Road shopping belts, Novotel Singapore on Stevens has 254 rooms, a 400-seat ballroom, meeting facilities, food and beverage outlets, a fitness centre and a swimming pool. Mercure Singapore on Stevens has 518 rooms.

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After a Market Swoon, Investors Are Seeking Safety

After rising for nine years in a so-so economy in the belief that prosperity was just around the corner, stocks swooned, even as growth picked up.

That left many investors wondering whether the economy is turning another corner into a place where danger, maybe even a recession and a prolonged bear market, lurk.

The S&P 500 dropped 13.5 percent during the fourth quarter, including dividends, giving the index a 4.4 percent loss for the year by that measure. It was the worst performance since 2008, despite strong corporate earnings and the best readings in several decades in unemployment and consumer confidence.

As 2019 unfolds and the economic picture becomes clearer, it is possible that stocks will have a sustained, orderly recovery, investment advisers say. But achieving that clarity will take time, so they encourage investors to demand a lot of evidence that a recession will be avoided before they commit money to stocks or other risky assets.

“A lot of the derating that happened in the second half of 2018 started off being driven by political risk, but in the last few weeks, it has been driven by concerns about growth and stability,” said Kate Moore, chief equity strategist at BlackRock, referring to the decline in stocks. “I think that’s going to go on in the first few weeks of 2019. Everyone’s focused on economic data.”

Ms. Moore highlighted surveys showing weaker-than-expected business conditions and added: “It’s going to take time for that to work itself through the market. I would expect more volatility as we take in new data points.”

Just how weak those data points are likely to be is hard to predict.

“The underlying fundamentals of the economy certainly have deteriorated,” said Edward Yardeni, president of Yardeni Research. He noted that the five monthly regional business surveys conducted by Federal Reserve districts “were all extremely weak in December.”

But the latest employment report was not. It showed 312,000 net jobs created last month.

“We have a very mixed economic picture right now,” Mr. Yardeni said. “It all adds up to an economy that’s slowing but probably still growing.” If that’s true, then 2019 may not be so bad for the market.

“Stocks are very cheap, with one important qualification,” he said: “You have to believe the economy is not going to wind up in recession.”

He then offered another qualification, about forthcoming corporate earnings reports: “We still have to curb our enthusiasm because we can’t get too excited about the earnings outlook.”

The tax cuts that took effect in 2018 sent earnings up so much for the year — the latest estimate for the S&P 500 was 20.2 percent, according to FactSet Research — that a 5 percent rise in earnings in 2019, aided by corporate buybacks, is about as much as Wall Street can expect, Mr. Yardeni said. FactSet’s latest forecast is for a 7.3 percent increase.

Despite some good days for the market in January that may have been prompted by signs of flexibility from the Federal Reserve, the way stocks tumbled late in the year hardly inspires confidence. With anything like a repeat performance, investors will have to hope that other assets provide better protection than in 2018, when there were few places to hide.

“Cash was the only major asset class that posted positive returns in ’18,” according to a Bank of America report. Even the reed-thin 1.9 percent return on cash in money market funds was less than the 2.2 percent consumer inflation rate, the report said, but at least it was a positive number. Long-term government bonds, corporate bonds and gold all lost ground, although they beat the return of the S&P 500. Oil and foreign stocks were among the investments that did worse.

The average domestic stock fund lost 14.2 percent in the fourth quarter, with specialists in natural resources, technology and financial services leading the way down. These funds dropped 6.8 percent during the year, according to Morningstar. International stock funds outperformed during the quarter, losing 10.9 percent, but trailed badly for the full year, down 13.2 percent.

Bond funds lost 0.9 percent in the quarter and 1 percent for all of 2018. High-yield portfolios were particularly weak, off 4.6 percent for the quarter and 2.8 percent for the year.

Such across-the-board weakness is rare “because what tends to be bad for one asset tends to be good for some other asset somewhere,” said Ben Inker, head of asset allocation for the investment firm GMO. “The basic exception is when there is a combination of rising rates and slowing growth. Risky assets don’t like slowing growth, and fixed income doesn’t like rising rates.”

Mr. Inker, like many, is worried that the Fed could push a fragile economy into recession. That would be “fairly ugly for valuations” of American stocks, he said, and he would avoid them even if he were confident that a recession could be skirted. He prefers stocks and bonds in emerging markets, which are much cheaper than their counterparts in mature economies.

Mutual Funds

Highlights of mutual fund performance in the fourth quarter.

Leaders and Laggards

Stocks vs. Bonds

Among general domestic stock funds.

Average returns, by fund category.

12 MONTHS

4TH QTR.

LEADERS

12 MONTHS

4TH QTR.

+

1.2

1.0

13.2

6.7

%

+

0.9

0.9

10.9

14.5

%

Municipal bonds

American Funds

College 2024

+

0.6

3.5

15.7

2.8

2.5

2.0

2.0

n.a.

%

1.3

2.3

2.7

2.7

2.7

3.3

3.3

3.4

%

Taxable bonds

Russell Inv.

Multi-Strategy

International stocks

Copley

General stock funds

American Funds

Retire Inc. Port.

Growth vs. Value

Vanguard

Wellesley Adm.

Returns in the fourth quarter.

Growth

Blend

Value

Manning & Nap.

Pro-Blend

0

%

American Funds

College 2027

5

Goldman Sachs

Tactical Tilt

10

15

20

Large cap

MiD cap

Small cap

12 MONTHS

4TH QTR.

LAGGARDS

Sector by Sector

Hotchkis & Wiley

Mid-Cap Value

19.5

23.1

25.5

10.5

23.3

31.9

23.3

34.2

%

25.8

25.9

26.2

26.8

27.7

30.1

31.3

32.3

%

12 MONTHS

4TH QTR.

Adirondack

Small Cap

Multicurrency

+

+

3.8

2.0

5.8

14.3

6.7

1.2

15.5

2.6

13.6

21.0

%

+

1.9

2.0

6.9

9.5

11.9

14.9

16.5

17.5

18.4

19.5

%

Utilities

RBC Sm. Cap

Core

Real estate

Miller

Opportunity

Consumer defensive

Communications

Tarkio

Health

Towle Deep

Value

Financial

Technology

CM Advisors

Sm. Cap Value

Equity energy

Hodges Retail

Natural resources

Stocks vs. Bonds

Average returns, by fund category.

12 MONTHS

4TH QTR.

+

1.2

1.0

13.2

6.7

%

+

0.9

0.9

10.9

14.5

%

Municipal bonds

Taxable bonds

International stocks

General stock funds

Growth vs. Value

Returns in the fourth quarter.

Growth

Blend

Value

0

%

5

10

15

20

Large cap

MiD cap

Small cap

Sector by Sector

12 MONTHS

4TH QTR.

Multicurrency

+

+

3.8

2.0

5.8

14.3

6.7

1.2

15.5

2.6

13.6

21.0

%

+

1.9

2.0

6.9

9.5

11.9

14.9

16.5

17.5

18.4

19.5

%

Utilities

Real estate

Consumer defensive

Communications

Health

Financial

Technology

Equity energy

Natural resources

Leaders and Laggards

Among general domestic stock funds.

LEADERS

12 MONTHS

4TH QTR.

American Funds

College 2024

+

0.6

3.5

15.7

2.8

2.5

2.0

2.0

n.a.

%

1.3

2.3

2.7

2.7

2.7

3.3

3.3

3.4

%

Russell Inv.

Multi-Strategy

Copley

American Funds

Retire Inc. Port.

Vanguard

Wellesley Adm.

Manning & Nap.

Pro-Blend

American Funds

College 2027

Goldman Sachs

Tactical Tilt

12 MONTHS

4TH QTR.

LAGGARDS

Hotchkis & Wiley

Mid-Cap Value

19.5

23.1

25.5

10.5

23.3

31.9

23.3

34.2

%

25.8

25.9

26.2

26.8

27.7

30.1

31.3

32.3

%

Adirondack

Small Cap

RBC Sm. Cap

Core

Miller

Opportunity

Tarkio

Towle Deep

Value

CM Advisors

Sm. Cap Value

Hodges Retail

By The New York Times | Source: Morningstar

“We’re reasonably bullish on our ability to make money in 2019, just not in the assets most people have most of their money in,” he said.

One reason for the poor returns on stocks, especially in December, is that the Fed initially had not seemed to share the fear felt on Wall Street. When the Fed raised its target for short-term interest rates last month, the move was almost universally anticipated, but the statement about economic conditions and monetary policy made after the increase “was not as dovish as the market was hoping for,” said Steve Kane, a bond fund manager at TCW.

Recent data “signals an economic slowdown,” and not just in the United States, Mr. Kane said. Surveys “confirm a significant drop in manufacturing activity. There are also signals that growth in China is slowing dramatically and significantly,” he said.

The flattening yield curve, with short-term interest rates approaching long-term rates, is consistent with an economy that is running out of steam, and a source of concern in itself. But recent remarks by Jerome H. Powell, the Federal Reserve chairman, that the central bank will have “patience” in deciding whether to raise rates, appeared to cheer the markets.

If rates are priced for a slowdown, some corporate bonds are not, Mr. Kane said. At least not yet. Spreads in yields between corporate and government debt have widened, taking bond prices down. Medium-term investment-grade corporate issues yielded 1.76 percentage points more than equivalent Treasury paper, as of Tuesday, according to the Federal Reserve Bank of St. Louis, and an index of high-yield debt yielded 4.65 points more. A two-point cushion is roughly where investment-grade spreads tend to peak during a slowdown, but high-yield spreads typically soar to 10 points.

“One should look at the fixed-income market as being more attractive to invest in 2019 than 2018, but one must still invest with some degree of caution, especially in the high-yield market,” he said. “There will be better opportunities later in the year” in high yield, while “there is not too much downside to investment-grade credit at this point.” He called it “a fairly good asset class if we’re in the midst of a bear market in equities.”

Stocks that Ms. Moore at BlackRock thinks would do comparatively well against such a backdrop are of companies that are financially strong and able to grow, even when economic growth is modest at best. Health care is her top sector because it has those defensive qualities, as well as pockets of innovation, such as in medical technology, that support high profit margins.

She said she is “not throwing in the towel on tech” in general, despite plunging share prices in big names like Apple and Facebook, and she said she particularly likes Asian tech companies. Ms. Moore also is “modestly encouraged” about emerging markets in Latin America and Asia, most notably Brazil and India.

Brian Singer, head of dynamic allocation strategies at William Blair & Company, has been investing “with a greater emphasis on risk management,” he said. He finds American stocks “fundamentally less attractive” than others, such as emerging markets, including the two that Ms. Moore mentioned.

Among mature economies, Mr. Singer likes Britain, although he would rather wait until the question of its departure from the European Union, Brexit, is settled before stepping in, and Spain. Markets he is shunning, aside from the United States, are Japan, Canada, Mexico and South Africa. As for bonds, he is avoiding the high-yield market, and he talked up the virtues of another asset class that is often overlooked.

“In this environment, cash will be a relatively good alternative,” he said. “It won’t be a great return generator, but being cautious and holding cash is not a bad idea. It really is a time to remain defensive and have dry powder on hand.”

With so much up in the air, Mr. Yardeni recommends not getting carried away. Investors should be selective about stocks and avoid index-tracking exchange-traded funds.

“This is probably a year for stock pickers,” he said. “It’s not a year for E.T.F.s.”

He would emphasize domestic stocks and limit exposure to emerging markets, which may suffer from soft commodity prices, and to Europe, which is dealing with thorny issues like Brexit and Italy’s recalcitrance in reining in government spending. The aging population bodes ill for long-term growth in Europe, too, Mr. Yardeni said, something that also applies in China.

He favors industries like technology, communications and media, which he expects to benefit over the long haul from the impending introduction of 5G, the fifth generation of mobile communications technology. Big banks and health care companies should do well, too, he said.

With investors focused on what’s going wrong, Mr. Kane recommends that they also keep in mind what’s going right, in particular the strong job market, although he noted that employment is often the last indicator to deteriorate as the economic cycle turns.

“If that part of the economy holds up, then this may not be a recession,” he said. “You could get a very nice return for stocks if that turns out to be the environment.” But he acknowledged that it’s a big if.

A crucial question for him is whether the decline will be fairly mild by the time it’s over, or something more severe, as in the 2008 financial crisis. For all the talk of recession, the losses so far have appeared calm and orderly, suggesting to him that too few investors have been asking the same question.

“Whether it’s a garden-variety or end-of-days bear market,” he said, “there’s going to be panic, and we haven’t gotten quite there yet.”

Source: Read Full Article

U.S. stocks pause after five-day rally; dollar rebounds

NEW YORK (Reuters) – Wall Street ended little changed on Friday, taking a breather following a five-day winning streak, while the dollar rebounded against most currencies from earlier losses tied to expectations the U.S. central bank is in no hurry to raise interest rates.

Earlier weakness in stocks and data showing a decline in U.S. consumer prices in December stoked investor appetite for Treasuries, pushing their yields lower.

Stocks have rallied this week, helped by promises of patience from the Federal Reserve, the ECB mulling more cheap money, and progress in trade talks between Washington and Beijing.

“These risks seem more under control,” said Kristina Hooper, chief global market strategist at Invesco in New York.

Earlier Friday, U.S. stocks retreated as investors booked profits and reset positions ahead of the earnings season.

The initial pause came in the wake of a strong start to 2019, which lifted the S&P 500 .SPX by more than 10 percent from a 20-month low it touched around Christmas.

With big U.S. banks kicking off the fourth-quarter reporting season next week, investors will comb through earnings reports and projections for signs of a slowdown in economic growth.

The Dow Jones Industrial Average .DJI fell 5.97 points, or 0.02 percent, to 23,995.95, the S&P 500 .SPX lost 0.38 point, or 0.01 percent, to 2,596.26 and the Nasdaq Composite .IXIC dropped 14.59 points, or 0.21 percent, to 6,971.48.

For the week, the Dow rose 2.4 percent, the S&P 500 added 2.54 percent and the Nasdaq gained 3.45 percent.

The pan-European STOXX 600 benchmark was up 0.09 percent, bringing its weekly gain to 1.7 percent.MSCI’s all-country index .MIWD00000PUS, was flat at 473.26. It posted a weekly increase to 2.9 percent, which was its strongest such rise in six weeks.

Treasury yields fell on safe-haven buying spurred by stock losses and as data showed U.S. consumer prices fell for the first time in nine months in December.

“There’s a bit of profit-taking in stocks so that helped to rally Treasuries,” said Larry Milstein, head of U.S. government and agency trading at R.W. Pressprich & Co. in New York.

The yields on benchmark 10-year U.S. Treasury notes US10YT=RR fell 3 basis points at 2.702 percent, holding below a two-week peak reached earlier this week.

In currency markets, the dollar rose against the euro, boosted by technical factors after the euro hit key resistance levels.

The euro was down 0.32 percent against the dollar EUR= at $1.1463, marking a weekly gain of 0.6 percent.

China’s onshore yuan CNY=CFXS finished the domestic session at 6.7482 per dollar, up 1.8 percent this week in its biggest gain since July 2005 when Beijing abandoned the yuan’s peg to the dollar.

In commodities, oil prices declined, reducing their weekly gains tied to hopes that the United States and China may soon resolve their trade dispute.

Brent crude LCOc1 settled down $1.20 or 1.95 percent to $60.48 a barrel, ending the week with a 6 percent gain.

U.S. crude futures CLc1 settled $1 or 1.90 percent lower at $51.59 a barrel, resulting in a weekly gain of about 8 percent which was the largest increase since June.

Gold edged higher for a fourth straight week of gains on bets the Fed could soon stop raising interest rates, which boost the appeal of the non-yielding metal. Spot gold XAU= rose 0.09 percent to $1,287.5 per ounce.

Source: Read Full Article

U.S. stocks pause after five-day rally; dollar rebounds

NEW YORK (Reuters) – Wall Street ended little changed on Friday, taking a breather following a five-day winning streak, while the dollar rebounded against most currencies from earlier losses tied to expectations the U.S. central bank is in no hurry to raise interest rates.

Earlier weakness in stocks and data showing a decline in U.S. consumer prices in December stoked investor appetite for Treasuries, pushing their yields lower.

Stocks have rallied this week, helped by promises of patience from the Federal Reserve, the ECB mulling more cheap money, and progress in trade talks between Washington and Beijing.

“These risks seem more under control,” said Kristina Hooper, chief global market strategist at Invesco in New York.

Earlier Friday, U.S. stocks retreated as investors booked profits and reset positions ahead of the earnings season.

The initial pause came in the wake of a strong start to 2019, which lifted the S&P 500 .SPX by more than 10 percent from a 20-month low it touched around Christmas.

With big U.S. banks kicking off the fourth-quarter reporting season next week, investors will comb through earnings reports and projections for signs of a slowdown in economic growth.

The Dow Jones Industrial Average .DJI fell 5.97 points, or 0.02 percent, to 23,995.95, the S&P 500 .SPX lost 0.38 point, or 0.01 percent, to 2,596.26 and the Nasdaq Composite .IXIC dropped 14.59 points, or 0.21 percent, to 6,971.48.

For the week, the Dow rose 2.4 percent, the S&P 500 added 2.54 percent and the Nasdaq gained 3.45 percent.

The pan-European STOXX 600 benchmark was up 0.09 percent, bringing its weekly gain to 1.7 percent.MSCI’s all-country index .MIWD00000PUS, was flat at 473.26. It posted a weekly increase to 2.9 percent, which was its strongest such rise in six weeks.

Treasury yields fell on safe-haven buying spurred by stock losses and as data showed U.S. consumer prices fell for the first time in nine months in December.

“There’s a bit of profit-taking in stocks so that helped to rally Treasuries,” said Larry Milstein, head of U.S. government and agency trading at R.W. Pressprich & Co. in New York.

The yields on benchmark 10-year U.S. Treasury notes US10YT=RR fell 3 basis points at 2.702 percent, holding below a two-week peak reached earlier this week.

In currency markets, the dollar rose against the euro, boosted by technical factors after the euro hit key resistance levels.

The euro was down 0.32 percent against the dollar EUR= at $1.1463, marking a weekly gain of 0.6 percent.

China’s onshore yuan CNY=CFXS finished the domestic session at 6.7482 per dollar, up 1.8 percent this week in its biggest gain since July 2005 when Beijing abandoned the yuan’s peg to the dollar.

In commodities, oil prices declined, reducing their weekly gains tied to hopes that the United States and China may soon resolve their trade dispute.

Brent crude LCOc1 settled down $1.20 or 1.95 percent to $60.48 a barrel, ending the week with a 6 percent gain.

U.S. crude futures CLc1 settled $1 or 1.90 percent lower at $51.59 a barrel, resulting in a weekly gain of about 8 percent which was the largest increase since June.

Gold edged higher for a fourth straight week of gains on bets the Fed could soon stop raising interest rates, which boost the appeal of the non-yielding metal. Spot gold XAU= rose 0.09 percent to $1,287.5 per ounce.

Source: Read Full Article

Battered U.S. bank stocks may get a boost this year

(Reuters) – After a miserable 2018, big U.S. bank stocks could be in for a lift if upcoming earnings releases show strong fourth-quarter loan growth helps to offset weak trading revenue.

And some bargain hunters are also betting on stronger 2019 growth than current valuations imply.

The S&P 500 bank index .SPXBK fell 18.4 percent in 2018 compared with a 6.2 percent drop for the broader S&P 500 .SPX as investors fled banks on concerns about slowing economic growth, weakening credit, a flattening yield curve and bets the Federal Reserve would slow down interest rate hikes.

While some investors are still wary of the sector, which was at the epicenter of the last economic downturn, others say the sell-off went too far. Lisa Welch, lead portfolio manager for the John Hancock Regional Bank Fund in Boston, was encouraged by a pickup in loan growth data in the fourth quarter and also expects banks to report improving net interest margins.

“With the valuations they’re trading at, we see banks as an extremely attractive buying opportunity,” said Welch. “Bank stocks were acting like the economy in the U.S. was going into a near term recession. We disagreed.”

S&P 500 banks currently trade around 9 times forward estimates, well below the long-term median of 11.6 and the long-term average of 12.7, according to data from Refinitiv.

“Even with a little more cautious view on the economy, that’s going to slow from the growth we had in 2018, we still think there’s a lot of earnings growth potential,” said Welch.

(GRAPHIC: S&P 500 Bank Valuation vs median and average – tmsnrt.rs/2SO1VI5)

On Friday the S&P bank sector was up 0.2 percent compared with a 0.2 percent decline for the benchmark index. [.N]

The fourth-quarter corporate reporting season will kick off with results from Citigroup Inc (C.N) on Monday, Jan. 14, followed by JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N) the next day.

Wall Street expects 25.5 percent fourth-quarter earnings growth for S&P 500 banks and 27.4 percent for 2018, according to IBES data from Refinitiv which show bank earnings growing at 10.7 percent in 2019.

According to Jefferies analysis of Federal Reserve data, U.S. bank loans grew 4.7 percent year-over-year in the fourth quarter compared with 3.2 percent a year ago, while commercial and industrial loans grew 9.2 percent in the fourth quarter compared with 2.6 percent in the year-ago quarter.

“We’ll have to see if that’s sustainable but at least that’s a better story for the fourth quarter,” said Kush Goel, senior research analyst at Neuberger Berman in New York. “People have become too pessimistic on the group. Loan growth and commentary will be better than people fear.”

Many bank investors have worried that bank credit costs will rise as the current economic expansion ages and as economic growth slows.

The sector has also been crushed by uncertainty about how much further the Federal Reserve will raise interest rates and how its hiking path will affect net interest margins and loan growth. While higher rates tend to boost bank margins, they could also stunt loan demand as borrowing gets more expensive.

Aaron Dunn, co-director of value equity for Eaton Vance in Boston, estimated a less than 50 percent chance of a “Goldilocks situation” where Fed policy is just right for banks.

While Dunn said bank stocks could rise in 2019, some valuations do not look cheap when rising credit costs are taken into account.

“You’ve seen the peak in great credit and it’s probably likely to get worse from here. I’m not saying its going to fall apart, just incrementally,” said Dunn who favors Citigroup shares over JPMorgan due to their valuations.

“I wouldn’t say we’re pounding the table buyers here in financials and banks. We’re picking up a couple of good opportunities here and there,” he said.

(GRAPHIC: Valuations of some of the biggest U.S. banks – tmsnrt.rs/2SRv718)

Source: Read Full Article

U.S. consumer prices post first drop in nine months on gasoline

WASHINGTON (Reuters) – U.S. consumer prices fell for the first time in nine months in December amid a plunge in gasoline prices, but underlying inflation pressures remained firm as rental housing and healthcare costs rose steadily.

Overall, the report from the Labor Department on Friday pointed to moderate inflation, which could support recent statements by Federal Reserve officials for caution about raising interest rates this year.

“The Fed will take this as further proof that price pressures are building more slowly than some have feared based on the strong growth of late and tight labor market,” said James McCann, senior global economist at Aberdeen Standard Investments. “It certainly seems to justify the Fed’s message about being more patient on rate increases.”

The Consumer Price Index dipped 0.1 percent last month, the first drop and weakest reading since March. The CPI was unchanged in November. In the 12 months through December, the CPI rose 1.9 percent after increasing 2.2 percent in November.

Excluding the volatile food and energy components, the CPI increased 0.2 percent, advancing by the same margin for a third straight month. In the 12 months through December, the so-called core CPI rose 2.2 percent, matching November’s increase.

December’s inflation readings were in line with economists’ expectations. The CPI rose 1.9 percent in 2018, slowing from a 2.1 percent increase in 2017. The core CPI increased 2.2 percent in 2018, up from 1.8 percent in 2017.

The Fed, which has a 2 percent inflation target, tracks a different measure, the core personal consumption expenditures (PCE) price index, for monetary policy.

The core PCE price index increased 1.9 percent year-on-year in November after rising 1.8 percent in October. It hit 2 percent in March for the first time since April 2012.

U.S. Treasury yields held near session lows after the CPI data, while the dollar extended losses against the yen and the euro. U.S. stock index futures were trading lower.

A sharp decline in oil prices amid an oversupply and slowing global economic growth is keeping overall inflation in check. Lower oil prices are also filtering through to core inflation via cheaper airline tickets.

GASOLINE PRICES TUMBLE

The Fed has forecast two rate hikes this year, but several policymakers, including Chairman Jerome Powell, have said they would be cautious about raising interest rates.

Powell reiterated that view on Thursday, saying “especially with inflation low and under control we have the ability to be patient and watch patiently and carefully” while the central bank monitored economic data and financial markets for risks to growth.

Minutes of the U.S. central bank’s Dec. 18-19 policy meeting published on Wednesday showed “many” officials were of the view that the Fed “could afford to be patient about further policy firming.”

Low inflation is also boosting households’ purchasing power, which could keep consumer spending supported.

Inflation-adjusted average weekly earnings surged 0.7 percent in December, the biggest gain since August 2015, after slipping 0.1 percent in November. Weekly earnings increased 1.2 percent in the 12 months to December, the most since July 2016, from 0.6 percent in November.

Last month, gasoline prices dropped 7.5 percent, the largest decrease since February 2016, after tumbling 4.2 percent in November. Food prices increased 0.4 percent. That was the biggest gain since May 2014 and followed a 0.2 percent rise in November. Food consumed at home increased 0.3 percent in December after rising 0.2 percent in the prior month.

Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, advanced 0.2 percent in December after rising 0.3 percent in November.

Healthcare costs increased 0.3 percent last month after jumping 0.4 percent in November. The cost of hospital services surged 0.5 percent, but prices for prescription medication fell 0.4 percent and the cost of doctor visits was unchanged.

Apparel prices were unchanged in December after dropping 0.9 percent in the prior month. Airline fares tumbled 1.5 percent and prices for used motor vehicles and trucks fell 0.2 percent after rising for two straight months.

But prices for household furnishings increased, likely because of tariffs imposed by the Trump administration on a range of imported Chinese goods. New motor vehicle prices were unchanged for a second straight month.

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