October has seen global stocks bounce back from their third-quarter nightmare. The MSCI All Country World Index is on track for its biggest monthly increase in four years, rising 8 percent, after sinking 10 percent the previous three months. The gains have been driven by fading expectations for a U.S. rate hike in 2015, while China announced measures to bolster its economy, including the sixth interest rate cut in a year. Asian stocks are heading for the biggest monthly jump in over six years. European stocks are on track to match the MSCI Asia Pacific Index, with the Stoxx Europe 600 Index on pace for its best month since July 2009, almost recovering its third-quarter drop.
History didn't repeat itself in Japan. Almost a year to the day from when the central bank unveiled record stimulus, it refrained from adding more even though it won't reach its 2 percent inflation target. That goal has been pushed back to the six months through March 2017, from the prior half-year period. Before today's announcement economists were evenly split on whether more stimulus would be unveiled. Japanese stocks rose after the Nikkei newspaper reported the government may consider extra fiscal stimulus if the economy needs it. The Nikkei 225 Index had its best month in over two years, jumping almost 10 percent.
Germany's DAX Index is Europe's best performing stock market in October. Worldwide it's only been bettered by primary indices in Jamaica and Argentina, which have risen 36 percent and 24 percent, respectively. It's been some turnaround for German stocks, which sank 12 percent in the third quarter, hurt by the Volkswagen emissions scandal. After plunging 53 percent July though September, the German automaker's preferred shares rebounded 11 percent in October. The DAX is still trading below its April record.
Only one currency in the world, out of the 156 tracked by Bloomberg, fared better than the Indonesian rupiah against the U.S. dollar in October: The Sierra Leone leone. The rupiah bounced back from an 8.6 percent third-quarter plunge, the biggest in two years. Behind its resurgence lay diminished prospects for higher U.S. interest rates and a stabilizing Chinese economy. With a December U.S. rate hike back on the table and a Chinese-induced currency war looming, forecasters like ABN Amro don't think the rupiah's rally will last. The world's worst performing major currency in October? The Swedish krona.
Crude was poised to end its fourth month below $50 a barrel amid a global glut that’s showing no signs of relief for oil and gas companies that posted more than $19 billion in write-downs in a single week.
Futures slid as much as 1 percent in New York. Output from Iraq, the second-biggest OPEC producer, exceeds 4 million barrels a day, Oil Minister Adel Abdul Mahdi said, according to Almada news website. U.S. crude stockpiles rose for a fifth week through Oct. 23, keeping supplies more than 100 million barrels above the five-year seasonal average, government data showed Wednesday.
Oil failed to sustain a gain above $50 a barrel earlier this month as the Organization of Petroleum Exporting Countries pumps above its quota and the International Energy Agency estimates the surplus will remain until at least the middle of 2016. Royal Dutch Shell Plc announced its worst loss in 16 years on Thursday, including $8.2 billion in impairments.
“The rise in U.S. crude stockpiles presents headwinds and that seems to be the bigger story,” Ric Spooner, a chief analyst at CMC Markets in Sydney, said by phone. “It would take a move up beyond $50.90 to suggest we are in for some sort of larger corrective movement for oil.”
Oil Writedowns
West Texas Intermediate for December delivery fell as much as 46 cents to $45.60 a barrel on the New York Mercantile Exchange and was at $45.64 at 7:59 a.m. London time. The contract gained 12 cents to $46.06 on Thursday. Prices are up 2.3 percent this week and 1.2 percent higher for the month.
Brent for December settlement lost 37 cents to $48.43 a barrel on the London-based ICE Futures Europe exchange. It dropped 25 cents to $48.80 on Thursday. The European benchmark crude traded at a premium of $2.80 to WTI.
Barclays Plc predicted $20 billion of impairments for Southwestern Energy Co., Apache Corp., Chesapeake Energy Corp., Devon Energy Corp., Encana Corp. and Newfield Exploration Co. Southwestern’s $2.8 billion charge, announced Oct. 22, was double the Barclays forecast. The other five companies are scheduled to report third-quarter results next week.
Iran may roil global oil markets with plans to sell about 45 million barrels of fuel stored in tankers in the Persian Gulf within three months of the removal of sanctions on its economy, according to analysts. The OPEC producer is seeking to claw back the market share it lost under sanctions by boosting exports after a July deal with world powers to return to energy and financial markets.
Big U.S. oil companies are starting to think small.
A stubborn 16-month crude rout with no end in sight is driving the largest U.S. oil producers away from costly, high-risk megaprojects long touted as the industry’s future and toward safer shale operations that generate the cash needed to satisfy anxious investors.
Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp., ConocoPhillips and Hess Corp. have all either delayed or abandoned projects that range from the deep seas of the Gulf of Mexico to Canada’s oil sands and the U.S. Arctic. At the same time, Exxon and Chevron both announced plans to substantially increase U.S. crude production, largely as a result of their shale operations.
“What makes more sense in this environment: drill a $100 million well in the deepwater Gulf that might come up empty, or poke lots of holes in west Texas where you already know there’s oil for a few million apiece?” said Michael Webber, deputy director of the University of Texas Energy Institute.
Reduced Spending
Explorers are expected to slash spending on deepwater wells by 20 percent to 25 percent next year, compared with a 3 percent to 8 percent overall reduction on all types of fields, according to Barclays Plc analysts including J. David Anderson. The type of giant reservoirs that require megaproject treatment are now found in only the roughest, deepest and coldest parts of the world.
One example: An equipment failure forced Chevron to put its $5.1 billion Big Foot development, a deepwater Gulf of Mexico project that was supposed to begin pumping crude this year, on hold until at least 2018. The San Ramon, California-based company hasn’t said whether the delay will bloat the price tag, which already had risen 28 percent from a 2010 estimate of $4 billion.
International producers are failing to deliver 80 percent of megaprojects on time and on budget, compared with about 50 percent in 2005, said Neeraj Nandurdikar, oil and gas director at Independent Project Analysis Inc.
“It’s really bad for megaprojects now,” said Joseph Triepke, managing director at Oilpro.com and a former analyst at Citadel LLC’s Surveyor Capital unit. “When oil was $90 or $100 a barrel, there was a lot of wiggle room to make a return. But at $45 oil, there’s no wiggle room. Enormous projects can’t go over or be late.”
Updating Shareholders
West Texas Intermediate for December delivery fell 42 cents to $45.64 a barrel on the New York Mercantile Exchange at 7:43 a.m. London time.
Exxon and Chevron may update investors on their biggest ventures when they report third-quarter results on Friday. “Chevron is taking actions responsive to the current price environment,” said Kurt Glaubitz, a company spokesman. “We are getting our cost structure down and actively managing to a smaller capital program.” An Exxon spokesman declined to comment.
ConocoPhillips, the third-biggest U.S. oil producer, canceled plans in July to search the deep Gulf of Mexico this year. Terminating a long-term rig lease may cost the Houston-based company as much as $400 million.
Other megaproject disappointments include Exxon’s Kearl oil-sands development in western Canada, where logistical challenges and harsh weather repeatedly delayed the $12.7 billion project before its opening in 2013. Plans to increase output again by 2020 have been shelved indefinitely. At Chevron’s gas-export project in Gorgon, the largest construction undertaking in Australia’s history, rising labor costs helped bloat the price tag by about 20 percent to $54 billion.
Supply Glut
The shale drilling boom led to a supply glut that deflated prices by more than half since 2014 and shale remains one of the most economic options for producers. For Exxon and Chevron, that’s meant rededicating their spending to a region they’d mostly ignored for the half century before the shale boom while they pursued giant overseas discoveries.
Exxon has more than tripled the number of rigs it has drilling shale formations around the U.S. since buying XTO Energy for $35 billion in June 2010, Jack Williams, the senior vice president in charge of Exxon’s wells, said during a March meeting with analysts in New York. Exxon plans to double U.S. shale production in the next three years.
For Chevron, shale wells are forecast to contribute the equivalent of 160,000 barrels of daily oil output in the next two years, the company said in a March presentation to analysts. Despite the fall in crude markets, Chevron Chairman and CEO John Watson has so far stuck to his goal of boosting worldwide output 20 percent to 3.1 million barrels a day by the end of 2017, in large part because of shale.
Only 10 percent of non-shale discoveries this year will be profitable, down from 40 percent in 2010, said Julie Wilson, a senior exploration analyst at Wood Mackenzie. Cost overruns have afflicted 64 percent of oil and gas megaprojects and 73 percent of them have faced delays, according to an Ernst & Young LLP survey of 365 developments.
“Projects are getting bigger and bigger and they are failing more often,” said Howard Duhon, systems engineering manager at Gibson Applied Technology and Engineering Inc., which advises major oil companies on how to design deepwater projects. Equipment is more complex and project teams are three or four times bigger, and “it’s not clear we’re getting any better results,” he said.
ConocoPhillips reported its widest quarterly loss in more than six years as a crash in oil and natural gas prices tempered growth from Texas to Canada.
The largest major U.S. oil company without refining operations said it further reduced 2015 spending by $800 million for an anticipated total of $10.2 billion. ConocoPhillips lost $1.07 billion, or 87 cents a share in the third quarter, compared with a gain of $2.17 a share a year earlier, the Houston-based company said in a statement Thursday. It was the biggest loss since the fourth quarter of 2008.
The loss mirrored those of other major oil companies, including Royal Dutch Shell Plc, which reported a third-quarter net loss of $7.42 billion Thursday, the most in more than a decade. Exxon Mobil Corp. and Chevron Corp. report earnings Friday.
Chairman and Chief Executive Officer Ryan Lance has said ConocoPhillips will continue to support its dividend, which has a yield of about 5.6 percent and is among the highest for companies that explore for and produce oil and gas. Some analysts have questioned whether the company can continue to make those investor payments while funding new drilling and limiting spending to what it receives in cash from operations.
“That will be a challenge for them,” Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis, said in an interview before the earnings release. “Operationally, they’re doing well with what they can control, but they can’t control prices.”
Asset Sales
ConocoPhillips is among producers that have turned to asset sales to help shore up their finances, pay dividends and continue drilling after oil fell by more than half and natural gas declined to the lowest level in more than three years.
Oil and gas production rose 5.5 percent to the equivalent of 1.55 million barrels a day. Excluding one-time items, the company lost 38 cents a share in the third quarter, in line with the 38-cent average of 21 analysts’ estimates compiled by Bloomberg.
Results were released before the start of regular trading in New York. ConocoPhillips, which has 14 buy, 12 hold and two sell ratings from analysts, rose 3.2 percent yesterday to $53.34. The shares have fallen 23 percent this year. The company will hold an earnings call today at noon New York time.
Oil executives are standing by promises to protect dividend payouts from the collapse in crude prices even as they fire workers, cancel drilling projects and sell everything from oil fields to aircraft to conserve cash.
Exxon Mobil Corp., the world’s biggest oil explorer, declared a quarterly dividend on Wednesday that will raise the 2015 payout for the 33rd straight year. Within hours of Exxon’s announcement, Chevron Corp. disclosed a payout that will boost its annual remittance for a 28th straight year.
Oil producers as diverse as Britain’s BP Plc, Norway’s Statoil ASA, and ConocoPhillips and Occidental Petroleum Corp. of the U.S. are following the same track, maintaining or lifting dividends while curtailing other sorts of investments to cope with crude that has fallen to about $45 a barrel. Corporate boards and chief executives are loathe to upset yield-hungry investors who rely on their stocks to generate income, said economist Philip Verleger.
“These companies are no longer viewed as growth companies; they are viewed as sources of income to pension funds and retirees,” said Verleger, a former senior economist on the White House’s Council of Economic Advisers and founder of consulting firm PKVerleger LLC. “If they cut the dividend, their share prices would plummet.”
Shortage Set-up
The long-term risk for producers and oil-consuming industries is that shrinking investment now will lead to supply shortfalls years down the road, spurring another period of sharply escalating prices, he said.
“The supply is not going to be there and the price is going to go up,” Verleger said.
Exxon’s $2.88-a-share in dividend payouts this year will cost the company about $12 billion this year. Chevron’s $4.28-a-share distribution will burn about $8.1 billion.
Chevron intends to continue dividend payments “whatever the ensuing price is” for crude, Chief Financial Officer Patricia Yarrington said during a July 31 conference call with analysts and investors.
Exxon and Chevron are expected to report their weakest third-quarter profits in more than a decade when they disclose results on Oct. 30. International crude prices have plunged more than 50 percent since June 2014 as lagging demand growth around the world aggravated a supply glut from U.S. shale fields and the Persian Gulf.
Occidental, which earlier this month declared a 75-cent dividend payable Dec. 10, on Wednesday said it has frozen salaries, capped bonuses, offered voluntary severance and put the corporate aircraft and hangar up for sale to curb costs and raise cash. The Houston-based company also said it reduced capital spending by 20 percent in the third quarter and planned to cut it again during the current period.
The Grind
“They’re grinding down capex,” Tim Rezvan, an analyst at Sterne Agee & Leach Inc., said in a telephone interview Wednesday.
Statoil, Norway’s biggest oil company, cut $1 billion in planned 2015 investments and postponed the start of production at its Aasta Hansteen and Mariner fields to the second half of 2018 from 2017. The Stavanger-based company has a “very strong commitment” to its dividend policy, Chief Executive Officer Eldar Saetre said.
“Dividends are something that doesn’t go up and down with oil prices,” he said in an interview in Oslo Wednesday.
Next year’s looking like when Sweden will finally learn to live with a stronger krona.
After another bout of easing this week to counter the extra stimulus hinted at by the European Central Bank, the Riksbank will start reining in the measures it’s been using to combat deflation, according to Nordea Bank AB, Scandinavia’s biggest lender. SEB AB, the region’s top currency trader, says the change of tack will send the krona surging 12 percent against the euro by March, wiping out the declines caused by interest-rate cuts and bond purchases three times over.
There’s a sense that, unlike their counterparts in Frankfurt or Zurich, Sweden’s policy makers can tolerate a stronger currency as the economy shows the first signs of persistent growth in consumer prices.
“They can live with it,” said Carl Hammer, chief foreign-exchange strategist at SEB in Stockholm, who sees the krona climbing to 8.35 per euro in the first quarter of 2016, from about 9.4 on Monday. “They cannot continue on the path of following the ECB, and that ultimately is the factor that will bring a market positioned to short in krona to start to buy back the krona.”
While most banks aren’t as bullish as SEB, the median estimate in a Bloomberg survey still puts the krona more than 1 percent stronger by the end of the first quarter at 9.28 per euro.
That’s the biggest anticipated gain among major currencies after the dollar and pound -- even taking account of the krona’s jump from a three-week low when ECB President Mario Draghi signaled last Thursday that the bank will probably expand its stimulus program in December.
Not Derailed
While the ECB chief’s comments make it more likely Swedish officials will cut interest rates or boost their own quantitative-easing program when they meet on Wednesday, they’ll still seek to tighten policy next year, according to Nordea. It sees the krona climbing to 9.3 per euro by June and 9.1 by the end of 2016.
“At least, we’ll see a tightening of policy in Sweden before we see it in the euro zone,” said Niels Christensen, chief currency strategist at Nordea in Copenhagen. “We see a case for a stronger krona.”
The krona was the second worst-performing major currency versus both the euro and dollar in 2014, hitting a 4 1/2-year low against its European peer in December. It has leveled off since the Riksbank implemented a negative interest rate and QE program in February, but is still down about 4 percent since Sweden started cutting borrowing costs four years ago.
Turning Corner
Ex-Riksbank Deputy Governor Karolina Ekholm, now a finance ministry official, said Oct. 19 that those measures are starting to revive the economy. The central bank forecast in September that a trade-weighted measure of its currency would climb about 3 percent over the next 12 months.
After years suffering the worst deflation in the Group of 10, Sweden has posted four increases in annual consumer prices in 2015.
While September’s 0.1 percent rate is still way below its 2 percent target, the central bank predicted last month it would match its goal next year. That’s just as well as pressure is building on officials to raise interest rates to burst a bubble in the housing market.
Inflation is meanwhile going in the wrong direction for policy makers in the euro zone, where the rate turned negative last month. Consumer prices have been falling for almost a year in Switzerland, which has sold francs in international markets since abandoning an exchange-rate cap in January.
Sweden’s “upside surprise” in inflation means the Riksbank won’t cut rates on Wednesday and will encourage it to tighten the money supply in 2016, according to BNP Paribas SA. The French lender says it’s using the options market to bet the krona will climb to 9 per euro by August.
“The Swedish Riksbank won’t be able to match the degree of accommodation likely from the ECB indefinitely,” Vasilis Koutsaftis, a strategist at BNP in New York, wrote on Oct. 22, after Draghi’s QE comments. “As we move into 2016, these efforts are likely to be viewed as increasingly inconsistent with the central bank’s broader policy goals.”
U.S. stock index futures were slightly lower on Monday as investor optimism about central bank easing faded ahead of a Federal Reserve policy meeting this week.
* The Fed, which meets on Oct. 27-28, is scheduled to issue a statement on Wednesday. Investors will scrutinize it for a bearing on when the central bank could raise rates.
* While Fed Chair Janet Yellen has said the central bank could raise rates this year, it would do so only if there are clear signs of sustained economic growth.
* Traders are pricing in only a 6 percent chance of rates being increased on Wednesday and a 39 percent chance of a December hike, according to CME Group's FedWatch program.
* Wall Street closed higher on Friday after a rally in tech stocks helped the S&P 500 to positive territory for the year.
* Strong quarterly results from tech companies helped improve expectations on overall U.S. corporate earnings.
* S&P 500 earnings for the period are now expected to have declined a more modest 2.8 percent, compared with 4.9 percent forecast at the start of the reporting season, according to Thomson Reuters data.
* Data on new U.S. home sales is expected to show a decline to an annual rate of 550,000 units in September after two months of gains. The data is expected at 10:00 a.m. ET.
* Xerox's (XRX.N) shares were up 1.4 percent at $10.48 in premarket trading on Monday after it reported results and said it would review its operations.
* Valeant Pharmaceuticals (VRX.N) sank nearly 14 percent to $100.50. The company said it would set up a panel to probe allegations about its associations with specialty pharmacy distributor Philador.
* Ctrip.com (CTRP.O) rose 14.3 percent to $85.00 after the online travel firm said it would merge with Qunar Cayman Islands. Qunar jumped 26.5 percent to $50.00.
Futures snapshot at 6:59 a.m. ET:
* S&P 500 e-minis ESc1 were down 2.75 points, or 0.13 percent, with 90,125 contracts traded.
* Nasdaq 100 e-minis NQc1 were down 7.75 points, or 0.17 percent, on volume of 16,234 contracts.
* Dow e-minis 1YMc1 were down 15 points, or 0.09 percent, with 14,195 contracts changing hands.
Former central Bank of Nigeria, CBN Governor, Sanusi Lamido, has called on his successor to devalue the naira and warned that Africa’s biggest economy is in danger of a long term slump unless the government confronts slowing growth.
Sanusi Lamido
“Let’s stop being in denial, we cannot artificially hold up the currency,” Sanusi, now the Emir of Kano, Nigeria’s second-ranked Muslim leader, said in a speech he delivered on Thursday in Lagos broadcast on CNBC Africa. President Muhammadu Buhari “needs help on the economy,” he said. Buhari has said he opposes a weakening of the naira.
Under current Governor Godwin Emefiele, Nigeria’s central bank has curbed dollar funding since March, virtually fixing the exchange rate, even as other oil exporters from Russia to Colombia and Kazakhstan have let their currencies weaken. Nigeria derives two-thirds of government revenue and 90 percent of export earnings from sales of the commodity. Limiting access to dollars has stabilized the naira, which has closed at about 198-199 per dollar since declining about 8 percent in the first quarter.
The central bank’s rationing of hard currency and restrictions on foreign-exchange trading are hurting the economy, said Sanusi, 54. The economy expanded 2.35 percent on an annualized basis in the second quarter, the slowest pace since at least 2010.
Industry Deprivation
“We are depriving certain key industries of imports,” he said. “If we have to make a choice between economic growth and a devaluation, my recommendation is that we protect growth.”
Monetary officials should lower the key interest rate from a record high of 13 percent to help stimulate the economy since the government lacks the funds to boost spending in the face of lower oil prices, Sanusi said. Nigeria is Africa’s top crude producer.
“The portfolio flows are gone,” he said. “Inflation is already upon us. You have fiscal consolidation. It is time to loosen monetary policy. Otherwise we compound an exchange rate crisis for businesses with high borrowing costs and declining demand.”
Investment Outflows
Portfolio investors have fled Nigeria, with foreign holdings of naira government bonds falling to less than 10 percent of the total from 27 percent in 2013, according to Standard Chartered Plc. Sanusi also called on the ministers who will serve in Buhari’s cabinet not to act like “courtiers.”
“I hope people will have the courage to know that loyalty is about telling your boss the truth,” he said. Buhari, who came to power in May, has nominated ministers, although he hasn’t publicly unveiled their portfolios, and the Senate has to approve the nominees. Sanusi, who became governor in 2009, was suspended by former President Goodluck Jonathan in March 2014 after he accused the state oil company of withholding billions of dollars from the government.
He won praise from investors for cleaning up the banking sector after a crisis in 2009 and attracting more bond and stock investment from abroad.
“Lamido Sanusi, being an expert, has his ground for saying this,” Ibrahim Mu’azu, a spokesman for the central bank in the capital Abuja, said by phone. “The central bank may look into what he is saying.”
China's central bank cut interest rates on Friday for the sixth time in less than a year, and it again lowered the amount of cash that banks must hold as reserves in a bid to jump start growth in its stuttering economy.
Monetary policy easing in the world's second-largest economy is at its most aggressive since the 2008/09 financial crisis, as growth looks set to slip to a 25-year-low this year of under 7 percent.
Yet underscoring China's drive to deepen financial reforms, which many believe are necessary to invigorate the economy, the People's Bank of China (PBOC) said it was freeing the interest rate market by scrapping a ceiling on deposit rates.
The change, which Beijing had promised to deliver for months, will in theory allow banks to price loans according to their risk, and remove a distortion to the price of credit that analysts say fuels wasteful investment in China.
China's policy loosening came a day after the European Central Bank said it could give a bigger policy jolt to the economy as soon as December to fight falling prices.
"We've got half the world's central banks in easing mode," said Joe Rundle, the head of trading at ETX Capital in London. "And we'll probably see more easing from China to come."
The PBOC said on its website that it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.35 percent, effective from Oct. 24. The one-year benchmark deposit rate was lowered by 25 basis points to 1.50 percent.
The reserve requirement ratio (RRR) was also cut by 50 basis points for all banks, taking the ratio to 17.5 percent for the biggest lenders, while banks that lend to agricultural firms and small companies received another 50-basis-point reduction to their RRR.
The late-evening moves come just ahead of a high-level meeting in Beijing starting on Monday where senior Chinese leaders will thrash out the country's economic blue-print for the next five years.
Investors in Europe took cheer and shares soared, while the Chinese offshore yuan CNH=fell against the U.S. dollar.
"In the next step, monetary policy ... will be kept not too loose or too tight to ensure stable economic growth," the PBOC said in a separate question-and-answer session.
It added that China's current muted consumer inflation and falling market interest rates provided a window for the country to liberalize its deposit rates.
SOBERING DATA
It has been a tumultuous year for China's economy.
A summer stock market plunge and shock devaluation of the yuan CNY=CFXS in August roiled global markets and fanned fears of a hard landing, prompting Chinese leaders to take drastic measures to assure investors they have the economy under control.
Friday's easing came minutes after Premier Li Keqiang was quoted on state radio as saying that China will make "reasonable use" of rate and RRR cuts to keep its economy growing at a reasonable pace.
enior Chinese leaders do not usually comment directly on the country's rate or RRR adjustments.
The cuts came in the same week as sobering economic data for the third quarter that demonstrated the daunting challenges faced by the country's leaders, not least in achieving a growth target of around 7 percent set by the government.
Data released on Monday showed China's economy grew 6.9 percent between July and September from a year earlier, dipping below 7 percent for the first time since the global financial crisis.
With Chinese imports tumbling for the 11th straight month in September and producer prices stuck in deflation for more than three years, some analysts say China's policymakers have their work cut out.
"We’re still waiting for clear evidence of an economic turnaround," analysts at Capital Economics said in a note to clients.
"We are retaining our forecast that benchmark rates and the reserve requirement ratio will both be cut once more before the end of the year, with a further move in both early in 2016."
U.S. stocks rallied, with the Standard & Poor’s 500 Index wiping out losses for the year, as Microsoft Corp., Google parent Alphabet Inc. and Amazon.com Inc. added almost $100 billion in combined market value after quarterly profit topped estimates.
All three technology stocks soared at least 7 percent as of 12:01 p.m. in New York. Facebook Inc. also rose, breaking the $100 level for the first time. The Nasdaq 100 Index jumped 2.2 percent. The Standard & Poor’s 500 Index advanced 0.6 percent to 2,064.91.
“It’s great news to have these gorillas beat estimates, anytime you have Google, Microsoft and Amazon up it will balance out some of the weaker and more lackluster numbers recently,” Vincent Delisle, portfolio strategist at Scotia Capital Inc., said in an interview. “The market wants to feel good and it’s a cherry on top with these trademark companies beating estimates.”
Equities got a further boost today as China’s central bank cut its benchmark lending rate, stepping up efforts to cushion a deepening economic slowdown. The move comes ahead of Bank of Japan and Federal Reserve meetings next week, as central banks worldwide seek to revive slowing global growth and lackluster inflation.
“It’s been kind of a full house this week, every day some good news,” said Christian Gattiker, head of research at Julius Baer Group Ltd. in Zurich. “It’s been quite a mix, from the corporate side and the central banks. It looks like the whole monetary easing is heading into another round.”
Two months after the first correction since 2011 broke a yearlong calm in U.S. equities, the S&P 500 is jumping again, bringing its gain from its August low to 11 percent. The benchmark gauge now sits about 3 percent below an all-time high reached May 21.
Stocks fell so far and so fast in August that at its depth, the S&P 500 was 15 percent away from the average year-end prediction of Wall Street strategists. Now it’s about 4 percent away, with four stocks that already account for one-10th of the recovery in the last two months surging.
Internet and software stocks have been the biggest contributors to the recovery from August’s selloff. Since the bottom on Aug. 25 and before Thursday’s reports, Alphabet had risen 11 percent, Microsoft 19 percent and Amazon.com almost 21 percent. Facebook has gained more than 20 percent.
Technology stocks in the S&P 500 surged 2.8 percent today. Google parent Alphabet increased 7.3 percent as it sold more ads and kept costs under control, fueling better-than-projected sales and profit. Amazon added 6.7 percent after sales topped estimates, helped by the company’s fast-growing cloud-computing division. Microsoft surged 10 percent to the highest level in 15 years, also boosted by its cloud services.
“These are good companies that reported good numbers. That’s huge,” Phil Orlando, who helps oversee $360 billion as chief equity-market strategist at Federated Investors Inc. in New York., said by phone. “There’s a lot of hand-wringing over third-quarter earnings and on balance they’ve been pretty good.”
Earnings for S&P 500 companies are expected to drop 6.1 percent in the third quarter. Technology stocks are among four groups forecast to show growth in profits, with a gain of 1.6 percent for the period. More than 100 S&P 500 companies reported results this week, with mixed results.
Among other companies posting earnings today, Procter & Gamble Co. jumped 2.2 percent as cost cuts helped to offset the company’s sluggish sales. Whirlpool Corp. lost 10 percent, the most since 2011, as the company cut the top end of its full-year outlook.
Even amid the most volatile year for U.S. equities since 2011, professional stock forecasters on Wall Street have held steady in their year-end calls. The median estimate in January was for the S&P 500 to reach 2,225 in a year, a target that barely budged until mid-August, when a six-day selloff that erased $2 trillion in market value sent the forecast to 2,150, where it stands today.
RBC Capital Markets’ Jonathan Golub, whose forecast is 2,100, said in an interview Thursday that his target now has some “upside” again. “It’s frankly happening more than I’d expected or hoped for and I may have not been bullish enough about the resiliency of this market,” he said.
International Monetary Fund representatives have told China that the yuan is likely to join the fund’s basket of reserve currencies soon, according to Chinese officials with knowledge of the matter, a move that may make more countries comfortable using the unit or including it in their foreign-exchange holdings.
The IMF has given Chinese officials strong signals in meetings that the yuan is likely to win inclusion in the current review of the Special Drawing Rights, the fund’s unit of account, said three people who asked not to be identified because the talks were private. Chinese officials are so confident of winning approval that they have begun preparing statements to celebrate the decision, according to two people.
The Washington-based lender is reviewing the composition of the basket, with staff members due to present their recommendation to the fund’s executive board for a vote as soon as next month as part of a process scheduled for every five years. The board rejected including the currency following the last review, in 2010, concluding that the yuan didn’t meet the test of being “freely usable.”
Winning the IMF’s endorsement would validate efforts by President Xi Jinping to push through policies aimed at making the world’s second-biggest economy more market oriented, boosting China’s prestige as it prepares to host Group of 20 gatherings next year. At least $1 trillion of global reserves will convert to Chinese assets if the yuan joins the IMF’s reserve basket, according to Standard Chartered Plc and AXA Investment Managers.
“Prospects for approval seem to be favorable,” said Otaviano Canuto, executive director at the IMF for 11 countries including Brazil. The story “is going in the direction of the renminbi becoming a necessary component of the SDR,” he said, referring to the currency’s official name.
The People Bank of China’s move in August toward a more market-determined exchange rate was a “positive signal,” as was the sale this week in London of yuan-dominated bonds, Canuto said in an interview in Washington. The executive board still needs to consider the final report on the review by IMF staff, he said.
Board Discussions
Preliminary discussions by the executive board on the issue are pointing toward approval, said two other people familiar with the matter who asked not to be named. The board has requested that IMF staff members look into some of the operational challenges of including the yuan in the basket, such as the ability of the fund’s 188 member nations to quickly convert SDRs into yuan, according to one of the people.
The Chinese officials familiar with the matter spoke before the nation took another step toward liberalizing its financial system on Friday, as the PBOC removed the cap on deposit rates. That move was paired with cuts in interest rates and banks’ reserve requirements.
“We realize that although we’ve done a lot, it’s really first up to the staff, and second up to the board, to make a final judgment,” Jin Zhongxia, China’s representative to the IMF executive board, said in an interview Friday. “We have to fully respect their decision.” While he’s hopeful the board will approve the yuan’s inclusion, Chinese officials are being cautious in promoting their case, Jin said.
IMF spokeswoman Simonetta Nardin said in a statement that work on the review “continues as scheduled,” with fund staff members currently finishing up their report to be considered in November at a formal meeting of the board, which will make the ultimate decision.
The fund created the SDR in 1969 to boost global liquidity as the Bretton Woods system of fixed exchange rates unraveled. The basket currently includes the dollar, euro, yen and pound.
While the SDR is not technically a currency, it gives IMF member countries who hold it the right to obtain any of the currencies in the basket to meet balance-of-payments needs. The equivalent of about $280 billion in SDRs were created and allocated to members as of September, compared with about $11.3 trillion in global reserve assets.
SDR status is significant as “a seal of approval” from the IMF that the yuan is indeed an internationalized currency, AXA analysts said in May. The yuan can get a potential weighting of about 13 percent, according to an estimate by Bank of America Merrill Lynch in March. HSBC Holdings Plc said in an April note that the yuan’s share could be 14 percent, reflecting China’s importance in global exports.
Likely Outcome
“The most probable outcome is the board will vote to include the renminbi in the SDR basket,” said Meg Lundsager, who served as the U.S. representative on the IMF’s executive board from 2007 to 2014. “I really haven’t heard any big opposition. If there were countries which had real problems with it, they would have been raising their concerns.”
The U.S. took a step toward backing China’s SDR bid last month, when it softened its insistence that the Chinese implement financial reforms to win support. The U.S. now says it will support inclusion of the yuan if it demonstrates it meets the IMF’s technical criteria.
“This is going to make it very hard for the Chinese to undo a lot of these reforms,” said Lundsager, now a public-policy fellow at the Woodrow Wilson International Center for Scholars in Washington. “Once you move into this group of major currencies, it becomes pretty much impossible to backslide.”
To be sure, IMF staff said in a report in August that the yuan trails its global counterparts in major benchmarks, such as its use in official reserves, debt holdings and currency trading. Following the recommendation of staff, the board delayed by nine months, until the end of September 2016, the implementation of any change to the basket.
At the IMF’s annual meeting earlier this month in Lima, a top Chinese central banker said the government plans a number of measures to strengthen the currency’s case, such as issuing three-month treasury bills on a weekly basis to establish “representative” yuan interest and exchange rates.
“I think a political decision has already been made,” said Domenico Lombardi, director of the global economy program at the Centre for International Governance Innovation in Waterloo, Ontario. “The Chinese have invested considerable political capital. They’ve mobilized their intellectual and political resources to this purpose, and it’s a case that’s difficult to argue against.”
