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Stocks plunge may have been a too fearful reaction to trade, economic worries

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After sharp gains in the past week amid hopes for a trade deal, stocks fell back into correction mode Tuesday, plunging on worries the trade talks could fail and that global growth is slowing.

But some strategists said the selling, which took the Dow down as much as 800 points intraday, appeared to be overdone and could have also been made heavier by the fact that the stock market is closed for a full day Wednesday for President George H.W. Bush’s funeral. The selloff was also exacerbated by a big move in the bond market, with the trading there flashing warning signs about the economy.

“I don’t think this continues. I think this is people with their hair on fire,” said Steve Massocca, managing director with Wedbush Securities. “You had this rally that was based on this presumption that we had a deal with China. Now it’s clear, we don’t’ have a deal with China. We might have progress, but we don’t have a deal with China.”

The S&P 500 lost 3.3 percent, falling to the psychological 2,700 level, while the Dow Jones Industrial Average was off 3 percent at 25,027. The Nasdaq was down 3.8 percent, falling back into correction territory, and the small cap Russell 2000 lost 4.4 percent, its worst day in seven years.

Selling in the S&P accelerated around midday. when it broke its 200-day moving average at 2,762. Apple, which has been a beacon of market sentiment, was battered, losing 4.4 percent amid more concerns about iPhone sales. Tech was broadly lower, losing 3.9 percent, while the best performing sector, utilities, was barely positive. Regional banks were down 5.6 percent in the worst day since June, 2016, as interest rates sank.

Scott Redler, partner with T3Live.com, said there could have been some selling ahead of Wednesday when the market will be closed since traders won’t have the ability to control their positions. “For me cash is a position. We’ll have to go into Thursday and Friday and see if today had a lot of meaning or not,” he said.

President Donald Trump met with China President Xi Jinping Saturday, and the U.S. said it left the meeting with a standstill on new tariffs and an agreement on agriculture with China. But, reports have surfaced that China has a different version of events without the commitment on farm goods.

The worries about trade have been eating at investors, who have already been concerned that earnings will slow down next year, and so will stock market gains.

So it didn’t help that the bond market was sending its own scary signals about slowing growth. One of the biggest catalysts for the selling Tuesday was the behavior of the yield curve, which shows the relationship between short and longer-term government bond yields. Buyers jumped into the 10-year Treasury note, pushing its yield sharply lower and closer to the 2-year note yield.

Since some short term yields have risen above the 5-year Treasury already, traders speculated that the same could soon happen between the 2-year notes and 10-year notes. That is what the market calls inversion and has been a recession signal for decades. The difference between the 2-year and 10-year yields was at a narrow 11 basis points in afternoon trading.

Paul Hickey, co-founder of Bespoke studied the behavior of stocks and the yield curve, and said he found the stock market did a little better on average over the course of the next three, six and 12 months, when the spread between the 10-year and 3-month bill fell below 50 basis. He said there were eight occurrences since 1962 when the spread fell below 50, and only six of them preceded a recession.

But the narrower, or flatter, the curve gets, “the worse it is for the market,” he said. “Even worse for the market is when it’s below 50 and already inverted.” That spread fell below 50 for the first time in 11 years, and it is the part of the curve the Fed sees as most representative of fed funds.

“When you get the worse performance is after it inverts and gets positive again, and that’s when you really see the market weaken,” Hickey said.

Vinay Pande, head of trading strategies at UBS Global Wealth Management’s Chief Investment Office, said recessions often do follow inversions but there is no consistent pattern. “It’s between 50 to 600 days to an equity market top, going back to the 1980s. This is not a very useful thing,” he said.

Traders have been pointing to the speed at which the 10-year fell from above 3 percent to the 2.87 percent it was on Tuesday. Pande said part of the reason was that there was a large short position, and investors were forced to cover shorts, as well as some weak data points and inflation reports.

“We actually like the equity market here. I think the market has priced in a reasonably bad outcome,” said Pande. Barring a failure of China and the U.S. to find a trade agreement, he said the market should be alright.
“Near term we think you should be buying the dips,” he said.

Ari Wald, technical analyst at Oppenheimer, said Tuesday’s selling was more of the same pullback that roiled the market in October and November, after its reprieve.

“The market is oscillating in that type of range bound manner. I think it’s all suggestive of the same action we’ve really seen in recent months. This bottoming formation that’s trying to take place. The S&P is still below key resistance at 2,815 sot he bottoming continues,” he said.

Redler said the bottom of the range is 2,603 which the S&P hit in October. “The market is in a range. It’s trying to figure out what the bigger picture looks like, while traders navigate the technical points. A contributing factor was that traders got caught in Apple” Monday when it traded higher. “It looked like it had relative strength, but then the Cirrus news came out and it got downgraded. It’s another worm in the Apple.”

Cirrus cut its guidance due to weakness in the smart phone market.



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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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