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The Reason Behind Wall Street’s Resilience

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The Reason Behind Wall Street's Resilience

Looking back at the last few months, it seems that Wall Street has managed to remain extremely flexible and resilient under the onslaught of all the geopolitical upheaval that has been ricocheting around the world.

Some of the momentous events that have been hitting the markets in the recent past are:

To quickly refresh the memory, take a look at the chart used below. 

It shows the Standard & Poor’s 500 (S & P 500) reaction to the unexpected results of the referendum decision, by a narrow margin, to leave the European Union. 

This led to the pound plummeting to exchange rate lows and global markets experiencing a rapid domino knock on effect.

wall-street-1

Continuing with charts that show how the geopolitical climate is a definite catalyst to cause and effect on the markets, used below is the chart for the expected USD/TRY (US Dollar to Turkish Lira) exchange rate immediately after the news of the Turkish military coup

wall-street-2

And the final chart being used to display the markets seeming natural resilience is below.  

wall-street-3

It can be seen from the charts above –  that Wall Street’s brief fainting spells were quickly followed by a recovery that saw it once again continuing to climb quite relentlessly.

To further illustrate this tenacious attitude, the yield on the ten-year Treasury note experienced a sharp fall on July 15, when the events of the attempted military coup in Turkey hit the news cycles. 

The coup attempt failed and by that Monday the ten-year Treasury note bounced back when investors were quick to unload treasuries and other haven instruments once the situation in Turkey seemed resolved.

In an even more marked display of recuperative stamina was the U.S. market’s rapid-fire recovery after the United Kingdom voted to leave the European Union. 

This result was unexpected and caused the markets around the world to shed $3 trillion of the market value in two nerve-wracking days. 

While some other countries and their respective markets were still licking their wounds, Wall Street was quick to regain lost ground and recovered in about two weeks.

The pound is still yet to recover, and is loitering around $1.31, which is a low not seen for quite a few decades. 

But, in the primary, bonds and stocks recovered in a relatively short space of time.

It all bears looking into a little deeper.

There is more than a fair share of opinions and theories for the reasons behind the market’s apparent strength.

Central bank liquidity has been very generous of late, in the view of chief economist at G+ Economics, Lena Komileva. 

G+ Economics is a London-based market consultancy and research company.

Komileva is referring to the floating facility of accommodative policies that have been handed out by The Federal Reserve, The European Central Bank, and The Bank Of Japan, in the aftermath of the 2008 calamitous financial crisis. 

Many investors viewed the bailout policies that were implemented then, as a safety net that will always be available when needs arise in the future.

When disturbances like the Brexit results threaten a possible temporary pause in global growth, the central banks have no other option other than to act as a circuit breaker to curtail the spread of the damage. 

This is what Komileva believes.

She goes on to further state in a research note posted earlier this week, which the central monetary figures and authorities in the world, are not tracking different and separate national cycles anymore. 

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Some of the banks like the BOJ, ECB, and the Fed still stay committed to maintaining lower rates for longer than usual to be able to offset the global volatility caused by:

  • incidents of terrorism
  • slow or lack of confidence
  • capital shocks
  • trade slow-downs

This is, in effect, camouflaging the natural market forces of capital and economic de-globalization and politics. 

These forces, Komileva says, should not be fought.

Mario Draghi, the President of European Central Bank, mentioned central bank policies as one of the reasons why the financial markets in the Eurozone were not equipped to handle the post-Brexit volatility. 

He further stated in a news conference, that the financing conditions were remaining highly supportive and that was contributing to a strengthening to credit creation.

The S & P 500 is up 6% this year to date. 

Equities are trading at historically high valuations and with respectable returns despite still declining earnings. 

Greater volatility remains a possibility, but any correction is set to be of a short duration because there is most assuredly a central bank put.

This refers to the belief in the markets that that policy makers will be continuing to respond pugnaciously to market turmoil by liquidity measures and easing measures. 

This approach is forming the investors attitudes, and the unusual central bank activism has been seen to elevate a few asset prices artificially.

Market stability is not policy criteria for major central banks, per se. 

It is merely regarded as a by-product of easing measures in practice. 

The Federal Bank held back from raising the rates in June this year only days before the Brexit vote, and news relays about the shock results began to pour in. 

At the same time, in comparison, the Bank of England was quick to hint that the cutting of rates was a very real possibility at the next meeting.

U.S. investment strategist for Allianz Global Investors, Kristina Hooper, said in a posting regarding the Brexit market repercussions, that the results pushed rate expectations in the United States out further while the economy was still growing. 

That was positive news for the stock market in the short term. 

For stock gains to continue to be sustainable, it will be needed to see less artificial improvements in growth earnings.

The Federal Bank has a dual mandate i.e. the following will help understand:

  • Full employment
  • Price stability or inflation.

But the Fed is unable to ignore any serious market turmoil.

The Fed has so far been able to invoke international instability, and this includes any concerns about the Brexit implications, to delay further increases in the current benchmark interest rate. 

In 2015, falling commodities prices and the possible slowing of growth in China was deemed sufficient cause for the Federal Bank to postpone increases until the end of last year.

Come September, there are speculations or hints that rate increase in definitely in the cards.

 

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Automobiles

Pump Prices to Edge up After Attack on Iranian General, but Long-Term Effect Unclear

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By Jeff Ostrowski, The Palm Beach Post, Fla.

Motorists soon will see the effects of President Donald Trump’s decision to kill a prominent Iranian general. Whether pump prices rise a little or a lot depends on how quickly international tensions intensify.

Florida gas prices climbed an average of 7 cents a gallon in the past three days and could increase an additional 5 cents, AAA – The Auto Club Group said Monday.

The 7-cent increase was coming even before the U.S. air strike Thursday that killed Iranian Maj. Gen. Qassem Soleimani. That hike was a result of a rise in the price of crude oil in December.

News of the targeted killing of Soleimani sent crude oil surging nearly $2 per barrel on Friday. An increase of that magnitude typically translates to a 5-cent hike at the pump, AAA said.

The U.S. benchmark for crude oil traded Monday just above $63 per barrel, the highest level since May 2019. The price of oil makes up about half the price of a gallon of gas.

“What happens in the Middle East can have a direct impact on Americans’ daily lives by influencing what they pay at the pump,” said AAA spokesman Mark Jenkins. “Crude prices rise when there’s a threat of war, because of concerns over how the conflict could hamper supply and demand.”

Oil analyst Tom Kloza of energy firm OPIS agreed that pump prices in Florida likely will rise about 5 cents a gallon in the coming days.

“Then I have a hunch that things are going to calm down,” Kloza said Monday. “I don’t think we’re looking at $3 gas.”

The national average pump price Sunday was $2.585, while the Florida average was $2.526, AAA said.

Kloza expects only modest increases in part because of the timing of the attack. January is always a slow month for gas consumption in the United States.

There’s also the reality that sanctions leave Iran unable to export oil. Complicating the calculus is Iraq’s response to the U.S. attack. The drone strike on Soleimani took place in Baghdad, and some Iraqi politicians considered the assault an affront to Iraqi sovereignty.

While there’s no Iranian oil supply to be disrupted by a war, Iraq is an important producer.

Trump keenly watches oil prices and realizes that a price spike might erode his support in this year’s presidential election, Kloza said.

At the same time, Kloza added, “This president has proven to be unpredictable.”

Trump’s response has been typically uneven. Delivering an official statement at the Mar-a-Lago Club in Palm Beach, Trump’s tone was measured. He said the targeted killing was designed to pre-empt Soleimani’s planned attacks on American diplomats and soldiers.

“We took action last night to stop a war,” Trump said Friday. “We did not take action to start a war.”

However, over the weekend, Trump took to Twitter to threaten attacks on Iranian cultural sites.

“The United States just spent Two Trillion Dollars on Military Equipment,” Trump wrote Sunday on Twitter. “We are the biggest and by far the BEST in the World! If Iran attacks an American Base, or any American, we will be sending some of that brand new beautiful equipment their way…and without hesitation!”

##IFRAME_1##Iran has vowed vengeance, but military experts say the nation isn’t powerful enough to wage a direct war against the U.S.

“It’s still far too early to know how much of an impact this conflict will have overall on prices at the pump,” AAA’s Jenkins said.

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Economy

Stocks Rally Despite Impeachment News

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Stocks rose on Thursday as investors looked past the news of President Donald Trump’s impeachment as well as mixed U.S. economic data.

The Dow Jones Industrials advanced 53.85 points to begin trading at 28.293.13

The S&P 500 recovered 4.93 points to 3,196.07

The NASDAQ added 19.39 points to Wednesday’s all-time record, at 8,847.12.

The S&P 500 is up nearly 7% since House Speaker Nancy Pelosi launched a formal impeachment inquiry in September.

Cisco Systems was the best-performing Dow component, rising 1.6%. The consumer staples and real estate sectors led the S&P 500 higher, gaining 0.4% each. Micron Technology shares also contributed to Thursday’s move higher. Conagra shares surged more than 14% and were on pace for their biggest one-day gain since Oct. 16, 1989.

Micron shares climbed 3.5% on the back of strong quarterly results. The chipmaker posted earnings per share and revenue that topped analyst expectations.

On the economic data front, weekly jobless claims fell to 234,000 from 252,000 the week before. However, economists expected claims to fall to 225,000.

Meanwhile, the Philadelphia Federal Reserve’s business conditions index fell to 0.3 in December from 10.4 in the previous month. Economists expected the index to slip to 8.

The Democrat-led House of Representatives voted Wednesday to impeach Trump for abuse of power and obstruction of Congress. Trump became only the third president to be charged with high crimes and misdemeanors and will now face a trial in the Republican-controlled Senate.

Prices for the 10-Year U.S. Treasury were lower, raising yields to 1.94% from Wednesday’s 1.93%. Treasury prices and yields move in opposite directions.

Oil prices gained seven cents to $61.00 U.S. a barrel.

Gold prices moved forward $1.80 at $1,480.50 U.S. an ounce. Copyright © 2019 Baystreet.ca Media Corp. All rights reserved.

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Business

Washington State OKs Some of the Nation’s Toughest OT Rules

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SEATTLE — Washington state is adopting some of the nation’s most aggressive overtime rules, restoring protections for hundreds of thousands of salaried workers and taking what supporters say is a crucial step toward rebuilding the middle class.

The Department of Labor and Industries finalized the rules Wednesday and will phase them in by 2028. By that time, salaried workers making up to about $83,400 a year will be entitled to time-and-a-half pay if they work more than 40 hours per week.

Workers making more than that could also get overtime unless they are certain types of professionals — such as those with higher degrees — or unless they are truly managers or executives, as demonstrated by their ability to  and fire, direct other people’s work or make significant business decisions.

Many job categories will be affected, including shift managers at restaurants and retail establishments, office managers, some medical workers and other white-collar staff, officials said.

“We need to make sure the middle class shares in our state’s prosperity,” Washington Gov. Jay Inslee said in a news release. “Overtime protections ensure workers are fairly compensated when they work more than 40 hours in a given week — time that would otherwise be spent with their families and in their communities.”

Employees who are paid hourly have long been entitled to overtime. But salaried workers have generally been entitled to it only if they make less than a certain amount: about $23,660 under federal law, or more where state laws are more generous.

Those thresholds may have worked decades ago, when they meant that nearly two-thirds of salaried workers nationally were covered by overtime protections. But after a recession in the 1970s, lawmakers largely stopped updating them. Washington’s has been stuck at $13,000 since 1976.

As people’s salaries rose with inflation, they found themselves no longer eligible for overtime. Businesses have also been able to convert hourly workers into salaried ones who make just more than the threshold as a way to avoid  additional staff or paying overtime.

In other cases, workers have been classified as managers when their actual duties more closely resemble those of hourly workers, officials said.

By some estimates, as few as 7% of salaried workers across the country are now entitled to overtime.

The federal government and several states, including California, New York, Pennsylvania, Colorado, Michigan and Massachusetts, have recently updated or started to update their overtime rules, but none have adopted a target threshold as high as Washington’s, said Paul Sonn, state policy program director with the National Employment Law Project.

The rules adopted by the Trump administration will raise the threshold to cover workers making up to $35,308 a year — a significant cut from the $47,000 limit proposed by the Obama administration.

“The overtime threshold is to the middle class as the minimum wage is to low-wage work,” said Nick Hanauer, a Seattle venture capitalist whose think-tank , Civic Ventures, advocates for progressive economic policies. “It is the indispensable labour protection for middle class people.”

Business groups in Washington have agreed that the state’s rules needed to be updated, but they criticized the plans as drastic. The Association of Washington Business, warned when the proposed rules came out in June that they would be a shock to many businesses and that they could particularly hurt nonprofits.

The organization warned that many businesses might convert salaried workers to hourly ones, reducing scheduling flexibility.

After hearing extensive public comment, the department added two years to the phase-in period. The threshold will increase incrementally until it reaches 2.5 times the minimum wage — about $83,400 — by 2028. The rules will phase in more slowly for businesses with fewer than 50 employees.

The department estimates that by the time they are fully implemented, the new rules will give overtime protections to about 260,000 workers who don’t have them and strengthen overtime protections for about 235,000 others. Affected workers will also become eligible for sick leave and retaliation protections.

At a news conference Wednesday, Labor and Industries Director Joel Sacks gave an example of one type of worker who will be protected : a shift manager who makes $40,000 a year but is expected to work 60 hours a week.

Under the new rules, that worker will be paid overtime for the additional hours, or the business will need to  additional staff.

“It’s fair, it’s right and it’s long overdue,” Sacks said.

Among those who might be helped is Victor Duran, a co-manager of a sports apparel store south of Seattle. He said he makes about $52,000 a year and doesn’t get overtime, but is required to work at least 45 hours per week — and up to 60 during the holidays.

“We say bye to the family at the beginning of the season and say we’ll see them after Christmas,” Duran said.

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