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Pang of Uncertainty Spurs Profit-Taking

Pang of Uncertainty Spurs Profit-Taking



Overview:  The optimism among investors appears to have evaporated in the face of new US-Chinese tensions, possible delays in the next US fiscal stimulus, and new record virus infections in Australia and Hong Kong.   US stocks had pared early gains yesterday, and the high-flying NASDAQ finished lower after setting new record highs.  Hong Kong (-2.25%) and Australia (-1.3%) led the regional declines, though China eked out some modest gains, helped by the energy sector.  The MSCI Asia Pacific and Europe's Dow Jones Stoxx 600 are snapping three-day advances today, and US shares are pointing to a lower open.  Bond markets are narrowly mixed, and the peripheral European bonds have lost bid seen earlier this week on the EU agreement.  The US 10-year has slipped below 60 bp.  The dollar is mixed.  The euro has is at new 14-month highs, near $1.1570. The Australian dollar is just below 15-month highs near $0.7170.  Sterling and Norwegian krone are leading the decliners with 0.4% and 0.2% declines near midday in Europe.  Emerging markets currencies are also seeing profit-taking after the JP Morgan Emerging Market Currency Index rose 1.1% yesterday, the most in a month.  Gold reached almost $1866 before profit-taking saw it fall $20 before buying re-emerged.   Oil is also pulling back after reaching a four-month high near $42.50 yesterday basis the September WTI contract.  It is trading about a dollar below yesterday's highs.  

Asia Pacific

The US has apparently ordered China to close its consulate in Houston within a few days.  It is not immediately clear why, though some are linking it to surveillance or attempts to steal or disrupt US efforts to find a vaccine.  There are reports that officials in the consulate were destroying documents.  Chinese officials threaten a tit-for-tat response.  The yuan did appear to weaken on the news, though most currencies, as we noted, are softer today against the greenback.  

Preliminary July PMI readings will mostly be reported Friday, but Japan's was released today and confirms that the world's third-largest economy continues to struggle at the start of Q3.  The manufacturing PMI edged up to 42.6 from 40.1 and the services to 45.2 from 45.0.  The composite stands at 43.9, up from 40.8 in June.  Recall that it finished last year at 48.6.  The BOJ does not meet again until the middle of September, and there continues to be talk of another supplementary budget in the second half of the fiscal year that begins October 1. 

The dollar found support near its recent lows against the yen around JPY106.65 yesterday, and Tokyo refrained from selling it.  It edged back above JPY107 in the European morning, but we suspect the JPY107.20 area may cap it and what appears to be a risk-off day.   The Australian dollar's 1.6% advance yesterday was the largest in nearly seven weeks.  Limited follow-through buying saw it rise to almost $0.7170 today before the profit-taking was seen.  It is finding support about half a cent lower.  The PBOC set the dollar's reference rate at CNY6.9718 compared with a median model estimate of CNY6.9712.  The dollar rose back above CNY7.0, and its 0.4% advance is the largest in a couple of months.  


The UK Telegraph reports that post-Brexit trade negotiations with the EU are on the verge of breaking down.  Businesses are apparently being instructed to prepare to have future trade on WTO terms.  UK Prime Minister Johnson had previously threatened to walk away from the talks if there was no substantial progress by the end of this month, and the two sides are still far apart, according to reports.  Given the disruption that is bound to happen regardless of the talks, game theory would suggest negotiating until the last minute to demonstrate everything was done to minimize it.  The virus slowed the negotiations in the first place, and to stop now seems more like a threat. 

The EU agreement has not been approved by the EU Parliament, but there are already some different interpretations.  The EC is claiming a link between access to the new funding and adherence to the rule of law.  Both Hungary and Poland are subject to EU probes and reportedly given some assurances to secure their support for the historic Recovery Plan and EU budget.  Separately, Greece and Turkey's simmering conflict is escalating as Turkey explores contested water on the continental shelf.   

The euro is the second largest reserve currency behind the dollar.  Leaving aside theoretical debates about monetary union without fiscal union, many, if not most observers, see a chief obstacle to a greater reserve role is the lack of a common bond and bill market.   A new EU bond is clearly a welcome step in this context.  However, the size is relatively modest, and it could be a one-off, emergency-spurred offering.  A common bill market is also not in the cards.  This is why we are reluctant to fully embrace the EU's new budget and Recovery Plan as a major game-changer for the euro's reserve role.  

The euro made marginal news highs, a little shy of the $1.1550 level before profit-taking set in and knocked the single currency to almost $1.1500 in early European trade when new buying emerged. It could be linked to the 1.1 bln euro option at $1.15 that expires today and another one at the same strike for 1.2 bln euros tomorrow.  Recall that the 2019 high for the euro was near $1.1570. Sterling reached almost $1.2770 yesterday and is trading a cent below it near midday in Europe and is back below the 200-day moving average (~$1.2700). It found support a little below $1.2650, and the intraday technicals warn that the option at $1.2725 for roughly GBP460 mln that expires today may still be in play.   


Negotiations between the Republicans in the Senate and the White House appear to be stuck, and this may delay the next fiscal package into next month.  After the Republicans reach an agreement, then talks will be held with the House, where the Democrat-majority passed a bill for over $3 trillion that will be the basis of its position.  Meanwhile, the risk is that some programs, like the $600 a week federal unemployment insurance payment, expire.  

The other controversy is over Federal Reserve nominee Shelton, who, on a partisan vote, was approved by the Senate Banking Committee yesterday.  Critics do not like her gold views or that she apparently changed her views on other issues to become a more attractive nominee for President Trump.  However, the most important issue here is not the content of her views but the legitimate process that has been pursued.  Some observers urging the media and others to treat her differently if she is confirmed by the entire Senate, which is still an open question.  Six Republican dissenters could defeat the nomination.  Trump has appointed the majority of Fed governors, and the resilience of the institution tends to be under-appreciated by many of those who claim that Shelton will be a disruptive force.  

Canada's May retail sales showed a strong recovery from April's revised 25% drop (initially -26.4).  However, at 18.7%, it was not quite a strong as economists hoped.  Auto sales drove the gain, but even excluding them, retail sales rose 10.6%, as 10 of the 11 sectors improved, and the Statscan pointed to substantial gains last month as well.  Canada reports June CPI figures today.  The collapse in oil prices had driven the headline below zero, and it likely emerged from there for the first time since March.  Its three core measures have been more stable, but in any event, officials are more concerned about the economic slack.  The 10-year breakeven (the yield difference between conventional and inflation-linked bonds) set a new four-month high yesterday of a little more than 88 bp. Before the pandemic, it was closer to 140 bp. 

The US reports June existing home sales.  A strong gain is expected after the nearly 10% decline posted in May.  Housing and manufacturing appear to be leading the US recovery.  EIA oil inventory estimate will be watched as well following the API estimate of a 7.5 mln barrel build.  Mexico reports May retail sales.  A modest bounce (~3.5%) is expected after the 22.4% plunge in April.  

The US dollar was sold to around CAD1.3425 yesterday, its lowest level since June 11.  It is consolidating in a narrow range just above there so far today.  Previous support in the CAD1.3480-CAD1.3500 area should now offer resistance.  Like the Canadian dollar, the Mexican peso is little changed through the Asian session and the European morning.  The greenback is trading at the lower end of the recent range seen near MXN22.25.  Below there support is seen near MXN22.15. The MXN22.50 may offer initial resistance.  


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Fighting the Surveillance State Begins with the Individual

It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in…



It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in place, collecting data on the entire populace. This has been proven beyond a shadow of a doubt by people like Edward Snowden, a National Security Agency (NSA) whistleblower who exposed that the NSA was conducting mass surveillance on US citizens and the world as a whole. The NSA used applications like those from Prism Systems to piggyback on corporations and the data collection their users had agreed to in the terms of service. Google would scan all emails sent to a Gmail address to use for personalized advertising. The government then went to these companies and demanded the data, and this is what makes the surveillance state so interesting. Neo-Marxists like Shoshana Zuboff have dubbed this “surveillance capitalism.” In China, the mass surveillance is conducted at a loss. Setting up closed-circuit television cameras and hiring government workers to be a mandatory editorial staff for blogs and social media can get quite expensive. But if you parasitically leech off a profitable business practice it means that the surveillance state will turn a profit, which is a great asset and an even greater weakness for the system. You see, when that is what your surveillance state is predicated on you’ve effectively given your subjects an opt-out button. They stop using services that spy on them. There is software and online services that are called “open source,” which refers to software whose code is publicly available and can be viewed by anyone so that you can see exactly what that software does. The opposite of this, and what you’re likely already familiar with, is proprietary software. Open-source software generally markets itself as privacy respecting and doesn’t participate in data collection. Services like that can really undo the tricky situation we’ve found ourselves in. It’s a simple fact of life that when the government is given a power—whether that be to regulate, surveil, tax, or plunder—it is nigh impossible to wrestle it away from the state outside somehow disposing of the state entirely. This is why the issue of undoing mass surveillance is of the utmost importance. If the government has the power to spy on its populace, it will. There are people, like the creators of The Social Dilemma, who think that the solution to these privacy invasions isn’t less government but more government, arguing that data collection should be taxed to dissuade the practice or that regulation needs to be put into place to actively prevent abuses. This is silly to anyone who understands the effect regulations have and how the internet really works. You see, data collection is necessary. You can’t have email without some elements of data collection because it’s simply how the protocol functions. The issue is how that data is stored and used. A tax on data collection itself will simply become another cost of doing business. A large company like Google can afford to pay a tax. But a company like Proton Mail, a smaller, more privacy-respecting business, likely couldn’t. Proton Mail’s business model is based on paid subscriptions. If there were additional taxes imposed on them, it’s possible that they would not be able to afford the cost and would be forced out of the market. To reiterate, if one really cares about the destruction of the surveillance state, the first step is to personally make changes to how you interact with online services and to whom you choose to give your data.

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Forget Ron DeSantis: Walt Disney has a much bigger problem

The company’s political woes are a sideshow to the one key issue Bob Iger has to solve.



Walt Disney has a massive, but solvable, problem.

The company's current skirmishes with Florida Gov. DeSantis get a lot of headlines, but they're not having a major impact on the company's bottom line.

Related: What the Bud Light boycott means for Disney, Target, and Starbucks

DeSantis has made Walt Disney (DIS) - Get Free Report a target in what he calls his war on woke, an effort to win right-wing support as he tries to secure the Republican Party nomination for president. 

That effort has generated plenty of press and multiple lawsuits tied to the governor's takeover of the former Reedy Creek Improvement District, Disney's legislated self-governance operation. But it has not hurt revenue at the company's massive Florida theme-park complex.  

Disney Chief Executive Bob Iger addressed the matter during the company's third-quarter-earnings call, without directly mentioning DeSantis.

"Walt Disney World is still performing well above precovid levels: 21% higher in revenue and 29% higher in operating income compared to fiscal 2019," he said. 

And "following a number of recent changes we've implemented, we continue to see positive guest-experience ratings in our theme parks, including Walt Disney World, and positive indicators for guests looking to book future visits."

The theme parks are not Disney's problem. The death of the movie business is, however, a hurdle that Iger has yet to show that the company has a plan to clear.

Boba Fett starred in a show on Disney+.

Image source: Walt Disney

Disney needs a plan to monetize content 

In 2019 Walt Disney drew in more $11 billion in global box office, or $13 billion when you add in the former Fox properties it also owns. In that year seven Mouse House films crossed the billion-dollar threshold in theaters, according to data from Box Office Mojo.

This year, the company will struggle to reach half that and it has no billion-dollar films, with "Guardians of the Galaxy Vol. 3" closing its theatrical run at $845 million globally. 

(That's actually good for third place this year, as only "Barbie" and "The Super Mario Bros. Movie" have broken the billion-dollar mark and they may be the only two films to do that this year.)

In the precovid world Disney could release two Pixar movies, three Marvel films, a live-action remake of an animated classic, and maybe one other film that each would be nearly guaranteed to earn $1 billion at the box office.

That's simply not how the movie business works anymore. While theaters may remain part of Disney's plan to monetize its content, the past isn't coming back. Theaters may remain a piece of the movie-release puzzle, but 2023 isn't an anomaly or a bad release schedule.

Consumers have big TVs at home and they're more than happy to watch most films on them.

Disney owns the IP but charges too little

People aren't less interested in Marvel and Star Wars; they're just getting their fix from Disney+ at an absurdly low price. 

Over the past couple of months through the next few weeks, I will have watched about seven hours of premium Star Wars content and five hours of top-tier Marvel content with "Ahsoka" and "Loki" respectively. 

Before the covid pandemic, I gladly would have paid theater prices for each movie in those respective universes. Now, I have consumed about six movies worth of premium content for less than the price of two movie tickets.

By making its premium content television shows available on a service that people can buy for $7.99 a month Disney has devalued its most valuable asset, its intellectual property. 

Consumers have shown that they will pay the $10 to $15 cost of a movie ticket to see what happens next in the Marvel Cinematic Universe or the Star Wars galaxy. But the company has offered top-tier content from those franchises at a lower price.

Iger needs to find a way to replace billions of dollars in lost box office, but charging less for the company's content makes no sense. 

Now, some fans likely won't pay triple the price for Disney+. But if it were to bundle a direct-to-consumer ESPN along with content that currently gets released to movie theaters, Disney might create a package that it can price in a way that reflects the value of its IP.

Consumers want Disney's content and they will likely pay more for it. Iger simply has to find a way to make that happen.

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Stock Market Today: Stocks turn higher as Treasury yields retreat; big tech earnings up next

A pullback in Treasury yields has stocks moving higher Monday heading into a busy earnings week and a key 2-year bond auction later on Tuesday.



Updated at 11:52 am EDT U.S. stocks turned higher Monday, heading into the busiest earnings week of the year on Wall Street, amid a pullback in Treasury bond yields that followed the first breach of 5% for 10-year notes since 2007. Investors, however, continue to track developments in Israel's war with Hamas, which launched its deadly attack from Gaza three weeks ago, as leaders around the region, and the wider world, work to contain the fighting and broker at least a form of cease-fire. Humanitarian aid is also making its way into Gaza, through the territory's border with Egypt, as officials continue to work for the release of more than 200 Israelis taken hostage by Hamas during the October 7 attack. Those diplomatic efforts eased some of the market's concern in overnight trading, but the lingering risk that regional adversaries such as Iran, or even Saudi Arabia, could be drawn into the conflict continues to blunt risk appetite. Still, the U.S. dollar index, which tracks the greenback against a basket of six global currencies and acts as the safe-haven benchmark in times of market turmoil, fell 0.37% in early New York trading 105.773, suggesting some modest moves into riskier assets. The Japanese yen, however, eased past the 150 mark in overnight dealing, a level that has some traders awaiting intervention from the Bank of Japan and which may have triggered small amounts of dollar sales and yen purchases. In the bond market, benchmark 10-year note yields breached the 5% mark in overnight trading, after briefly surpassing that level late last week for the first time since 2007, but were last seen trading at 4.867% ahead of $141 billion in 2-year, 5-year and 7-year note auctions later this week. Global oil prices were also lower, following two consecutive weekly gains that has take Brent crude, the global pricing benchmark, firmly past $90 a barrel amid supply disruption concerns tied to the middle east conflict. Brent contracts for December delivery were last seen $1.06 lower on the session at $91.07 per barrel while WTI futures contract for the same month fell $1.36 to $86.72 per barrel. Market volatility gauges were also active, with the CBOE Group's VIX index hitting a fresh seven-month high of $23.08 before easing to $20.18 later in the session. That level suggests traders are expecting ranges on the S&P 500 of around 1.26%, or 53 points, over the next month. A busy earnings week also indicates the likelihood of elevated trading volatility, with 158 S&P 500 companies reporting third quarter earnings over the next five days, including mega cap tech names such as Google parent Alphabet  (GOOGL) - Get Free Report, Microsoft  (MSFT) - Get Free Report, retail and cloud computing giant Amazon  (AMZN) - Get Free Report and Facebook owner Meta Platforms  (META) - Get Free Report. "It’s shaping up to be a big week for the market and it comes as the S&P 500 is testing a key level—the four-month low it set earlier this month," said Chris Larkin, managing director for trading and investing at E*TRADE from Morgan Stanley. "How the market responds to that test may hinge on sentiment, which often plays a larger-than-average role around this time of year," he added. "And right now, concerns about rising interest rates and geopolitical turmoil have the potential to exacerbate the market’s swings." Heading into the middle of the trading day on Wall Street, the S&P 500, which is down 8% from its early July peak, the highest of the year, was up 10 points, or 0.25%. The Dow Jones Industrial Average, which slumped into negative territory for the year last week, was marked 10 points lower while the Nasdaq, which fell 4.31% last week, was up 66 points, or 0.51%. In overseas markets, Europe's Stoxx 600 was marked 0.11% lower by the close of Frankfurt trading, with markets largely tracking U.S. stocks as well as the broader conflict in Israel. In Asia, a  slump in China stocks took the benchmark CSI 300 to a fresh 2019 low and pulled the region-wide MSCI ex-Japan 0.72% lower into the close of trading.
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