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Charts suggest stocks will rip higher into 2019

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A pair of charts suggests stocks will stage a significant rally, no matter what happens with the midterm elections.

According to J.P. Morgan’s Jason Hunter, investors could be on the cusp of solid gains following the October correction.

“We feel comfortable thinking this is a late-cycle correction and not a bear market,” he said Tuesday on CNBC’s “Futures Now.” “We feel confident that the market is going to head higher into early next year.”

Hunter, the firm’s head of global fixed income and U.S. equity technical strategy, referred to the absence of the cross-market pattern that’s developed before each of the recessions in bear markets.

“The spread between 10-Year [Treasury] note yields and 2-Year [Treasury] note yield levels, as our lower panel here, and the progression that you generally saw was the yield curve inverts for the first time in each cycle,” said Hunter. “The key takeaway here is while we saw some volatility twice this year, the curve is not inverted yet. We are still above that zero line. It’s close, but zero matters here.”

Hunter’s second chart illustrates the underlying structure of the S&P 500 so far this year.

“You can see that as prices move lower, the momentum starts to trend higher, and ultimately that tells us that the correction is now getting long in the tooth,” he added. “We’re looking for a rebound to develop, and that’s what we see happening right now.”

His analysis came as S&P 500 tries to lock in its fifth positive session in six. The S&P, which fell almost 7 percent in October, is up more than 2 percent in the last week.

“The general idea for now: The curve is not inverted yet, so we’ll treat the pullback as a late-cycle correction and not the start of a bear market,” Hunter said.



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Hotshot active fund managers will soon have a way to play the ETF game

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Pedestrians walk past the New York Stock Exchange before the closing bell in New York.

Bryan R. Smith | AFP | Getty Images

A new kind of exchange-traded fund is expected to grant active money managers a way to offer their strategies without divulging their stock picks and methods, a key hang-up that’s kept them from participating in the booming industry.

ActiveShares, a product designed and built by Precidian Investments, received word from the Securities and Exchange Commission on April 8 that its so-called nontransparent ETF model should be approved.

Nontransparent ETFs would mask the underlying securities of the fund but still allow investors exposure to the portfolios arranged by Wall Street’s top stock pickers. Industry analysts also anticipate the funds will reduce key fund expenses and grant tax advantages — just like other ETFs.

Though Precidian is still awaiting a final order from the SEC, founding principal Stuart Thomas told CNBC the product is the first of its kind and could someday impact the entire mutual fund industry.

“At the end of the day, it looks, smells and feels like an ETF because it is an ETF,” Thomas said. “You’re taking actual slices of the portfolio — anytime there’s a creation or redemption in their appropriate weightings — and that’s what the authorized participant is delivering to the fund in exchange for ETF shares.”

“There’s nothing complicated, it fits perfectly within the ecosystem,” Thomas said of the ActiveShares model. “Trading, settling, reporting, monitoring: All the existing strategies the trading desks use today can be applied to this structure.”

ActiveShares could represent a big opportunity for a generation of active managers that have seen their assets evaporate at the hands of low-cost, passive alternatives drawing in big investor dollars.

At the end of April, passive U.S. equity fund assets reached parity with active U.S. equity funds at $4.3 trillion each, nearly 13 years after actively managed U.S. equity funds saw their last calendar year of net inflows and amid one of the longest bull markets ever, according to Morningstar Direct research.

But the new nontransparent funds could offer a way to recapture investor dollars, says J.P. Morgan analyst Kenneth Worthington.

“Precidian’s non-transparent ETF is a potentially crucial structure in the evolution of the actively managed mutual fund industry, as it holds the potential to deliver greater tax efficiency and meaningfully lower costs to fund investors,” Worthington told clients in a note Thursday.

‘Levels the playing field’

Part of the reason ETFs are so popular is their tax advantages compared with the traditional mutual fund model.

As long as the index an ETF tracks doesn’t see frequent changes to its composition, the funds themselves rarely have to adjust their portfolio to match. Also, when market makers redeem ETF shares, they receive securities instead of cash, further shrinking the need for the fund to declare gains.

“We see retail investors as long-term beneficiaries, and exchanges and trading firms stocks as being helped,” the analyst wrote. “We also think the structure levels the playing field somewhat between passive and active investing.”

“Potential linkages of ETFs and mutual funds could enhance the tax profile of existing mutual funds, making the products ‘must-haves’ for mutual fund companies,” he added.

Worthington sees T. Rowe Price in particular as a potential beneficiary of the new structure. Given its its size and relative success over the long term, the analyst said, it may be able to attract money from the passive side if it adopts such a model. The mutual fund manager has applied for a similar ETF structure with the SEC.

“We believe the Precidian approval is good news for those, including us, with proposals for semi-transparent ETFs in front of the SEC, and for investors,” T. Rowe told CNBC in an emailed statement. “We have more work to do to get our application through the SEC, and our ongoing conversations with the SEC staff continue to be constructive.”

Precidian’s Thomas has a history of innovating in the fund world. A Morgan Stanley and Merrill Lynch alum, he started World Gold Trust Services in August 2002. At the direction of the World Gold Council, he created, managed, and marketed the first U.S. commodity-backed equity traded on an exchange.

That ultimately evolved into SPDRGold Trust, the first U.S. traded gold ETF and the first U.S.-listed ETF backed by a physical asset. The Precidian team, which includes Daniel McCabe, Mark Criscitello and Paul Kuhnle, is also responsible for building the first currency-backed ETFs in the U.S. with Rydex. That platform is now owned by Invesco under its CurrencyShares suite.



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China’s currency is a strong barometer on US-China trade

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China’s currency has been an important barometer for progress in U.S.-Chinese trade talks, and right now it’s signaling that things aren’t going well.

The question is whether that signal is intentional, and whether Chinese officials will step in to prevent the yuan from reaching a key psychological low of 7 to the dollar. That level has become a line in the sand for markets around the world, and if broken, it could trigger a negative reaction in risk markets globally, as investors move to price in a bigger economic impact from a longer, more contentious trade war.

The yuan has been fairly stable this year, as the U.S. and China carried on trade talks. But since President Donald Trump tweeted about new tariffs May 5, the onshore yuan or CNY, has lost 2.7% against the U.S. dollar.

“Obviously, the trade shock we’re now discussing is a full blown trade war, so it’s obviously a very serious scenario. Then we have this negotiations period, where it could be averted and that doesn’t seem to be very good at all,” said Jens Nordvig, CEO of Exante Data. “It’s also unclear whether the Chinese officials want to fight hard to keep the currency stable. That’s a question mark that came in today.”

The onshore currency, or CNH, which trades in Hong Kong and is more impacted by international traders, hit a high of 6.945, while the onshore yuan, more controlled by the central bank, was just above 6.91 Friday. Nordvig said unlike other sessions, there was no sign Friday that the People’s Bank of China tried to stem the decline.

Also unclear was whether it was an intentional action, and Chinese officials were responding to trade tensions and the U.S. action this week blocking telecom firm Huawei from buying U.S. components.

CNBC reported Friday that trade talks between the two countries appear to have stalled, and the next round of talks have not yet been scheduled. 

A weaker yuan has been a source of friction between China and the U.S. for years. Trump, in the past, had accused China of intentionally weakening its currency, hurting the U.S. as a result. If China does allow its currency to weaken, its exports would become more attractive, but strategists say Beijing would then worry about capital flight and it would probably not want to risk that.

“The market is testing the central bank’s resolve to defend the 7 lever,” said Marc Chandler, global market strategist at Bannockburn Global Forex. “They’ll do in a couple of ways, partly through intervention, partly through draining liquidity, raising the cost of being short the Chinese currency. They can do this in the domestic money market and in the domestic Hong Kong market.”

Nordvig said the message the yuan is sending is not like the positive comments about the trade talks that U.S. officials like Treasury Secretary Steve Mnuchin or White House top economist Larry Kudlow have made.

“It looks like they’re not even being invited to China. If there’s no talks ahead of Trump and [President Xi Jinping] meeting in Osaka, then the meeting becomes binary and very risky,” said Nordvig. Trump and Xi are expected to meet on the sidelines of the G-20 meeting June 28.

“It would be very different if Mnuchin makes some progress on some chapters here in the next couple of weeks. If that doesn’t happen we come close to the cliff,” said Nordvig, adding the question is whether Chinese officials are going to hold the currency up.”

Strategists say the yuan current weakness is due to a strengthening dollar and trade war concerns, which in turn are prodding Chinese authorities to consider more monetary and fiscal policy moves.

“It’s selling off on expectations of easier monetary policy and apparently no trade talks. China says we haven’t invited the U.S. back,” said Chandler, adding he expects the currency to challenge the 7 level soon.

“I think we’ll test it. We’ll test Chinese resolve. It will become more of a concern that it will be an inflection point if the CNY or CNH get to 7. It will have a ripple effect on the markets. It will be another source of instability. Another rubicon has been crossed,” he said.

Adam Cole, head of G-10 foreign exchange strategy at RBC, said reports that unnamed Chinese officials said the PBOC would not let the currency trade through 7 suggests that such a move won’t happen soon. But he said the yuan could breach those levels in the future.

“Longer term, with the dollar generally going up against everything, I think that constraint becomes nonbinding,” Cole said. He said the dollar’s rise has to do with monetary policy positioning, cyclicality and the fact that the U.S. economy looks stronger than the rest of the world.

China has been reducing its holdings of Treasurys, which some say could be a warning to the U.S. But Cole said he does not believe China, the largest holder of Treasurys, would bail out of the market in a big way.

“That’s an ongoing concern. Like most people,we think the risk of China going through a sudden liquidation and allocation out of Treasurys is unlikely. That would be a case of cutting off your nose to spite your face, given how much China has to lose,” he said.



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America’s push to upgrade airports gets traction with new New Orleans

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New Orleans new airport terminal.

Source: City of New Orleans | MSY

Fly into New Orleans and you immediately see the construction of the airport’s new north terminal. With 35 gates, 14 TSA lanes and plenty of room to handle the growing number of people flying in and out of the Big Easy.

“As this market continues to grow we are in better position to handle the growth in this market,” said Kevin Dolliole, the director of aviation in New Orleans.

When the $1.3 billion New Orleans terminal opens later this year, it will completely replace the existing gates at the Louis Armstrong New Orleans International Airport. It’s the latest upgrade and expansion of an airport in the U.S., a key part of America’s infrastructure sorely in need of major renovations.

The Airports Council, a global industry trade group estimates U.S. airports will need $128 billion in upgrades by 2023.

“We are way, way, way behind,” former Transportation Secretary Ray LaHood said of the state of America’s airports compared to the other terminals around the world:

LaHood’s assessment is based on years of traveling around the globe both as a congressman and later as a member of former President Barack Obama’s cabinet. And he thinks Americans who fly around the world are tired of flying out of cramped, dated airports in the U.S. and landing in spacious, gleaming new ones overseas.

New Orleans new airport terminal.

Source: City of New Orleans | MSY

“When they go into an airport in Dubai, or Abu Dhabi or they go into an airport even in Seoul, South Korea, where I’ve been recently, these airports are state of the art.”

While the U.S. has not seen an new major airport open since Denver International in 1995, cities and states have been adding new terminals, runways and and the capacity to handle the record number of people flying today, more than 900 million last year according to the U.S. Department of Transportation.

Among the high profile airport renovations around the country:

  • New York LaGuardia is being rebuilt in a $8 billion project expected to be finished by 2022.
  • Salt Lake City is in the midst of a $3.6 billion expansion that includes two new concourses to handle the airports booming traffic which already tops 23 million passengers.
  • DFW in Dallas added 14 gates to increase the number of flights American Airlines can operate out of its hub.
  • Los Angeles International is revamping some of its domestic terminals and adding new connections to its international terminal as airlines increase their overseas routes from the city of Angels.

For New Orleans, a big focus in designing the new terminal is making the facility more efficient for travelers and the airlines. For example the gates are spaced farther apart, allowing planes to pull in and out at the same time, something not possible with the current layout of the airport.

Meanwhile, designers are intent on giving the new terminal a feeling that is uniquely New Orleans.

“They will know immediately they are in New Orleans. The taste, the sound, the excitement of the city is captured in this facility through its architecture,” said Dolliole.

Sharon Agee, who was waiting in the New Orleans airport to fly home to Atlanta, said travelers like her want bigger and better airports.

“We need shopping, we need comfortable places to have our phones, places to take our kids when we have delayed flights,” she said.

— CNBC’s Meghan Reeder contributed to this report.



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