Confidently Waiting - Financial Review

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DOW – 62 = 16,370
SPX – 8 = 1953
NAS + 26 = 4822
10 YR YLD un = 2.18%
OIL – .49 = 44.14
GOLD – .30 = 1109.40
SILV – .21 = 14.51

The story that will be leading markets throughout this week will be Thursday’s Federal Reserve interest rate decision. While market expectations of an increase in rates have fallen to 28 percent, down from over 50 percent a few weeks ago, economists insist the decision is still too close to call. The Fed has been saying they will hike interest rates; this may be one of the most telegraphed rate hikes in the Fed’s history, but circumstances keep changing.

Since the last Fed meeting, oil prices have dropped by 15%, the dollar has strengthened, China has slowed, emerging markets have softened, and there is little to no sign of inflation despite a Fed target of 2%. By the way, we’ll get one more report on inflation Wednesday, with the release of the CPI, or consumer price index. So, there are many reasons why the Fed might not raise rates, but then if they do stand pat, they risk coming across as timid, or worried that the recovery is in trouble.

If they hike rates they can give the impression they are confident, and confidence begets confidence. And so some clever folks think the Fed might try and split hairs by announcing one small increase and then saying they are done for a while.

We don’t know what the Fed will do, and whatever they do, raising the target for interest rates is not the only tool in the tool box. Keep in mind that there are several ways to influence interest rates, including interest paid on reserves banks hold with the Fed in the overnight repo market. If the Fed wants to reign in speculation, or slow the velocity of money – it’s an easy step. And it is a safe bet that whatever the Fed does with the headline announcement on Thursday, they will have a counteracting Plan B to go along with it.

The more difficult dance step is to try to raise rates only to have to turn around and cut them again. This has happened: central banks in the Eurozone, Sweden, Israel, Canada, South Korea, Australia, Chile and beyond have tried to raise rates in recent years, only to reduce them again as their economies stumbled – not exactly a confidence booster. The lesson is clear; there needs to be a really, really strong case for raising rates.

China’s investment and factory output missed forecasts in August, raising the chances that China’s third-quarter economic growth may dip below 7 percent for the first time since the global crisis.

Germany announced on Sunday night that the country could no longer cope with the unending flow of asylum seekers coming into the country, and would re-instate border controls with Austria. The move particularly surprised Austria, as just last week the two countries had worked together to freely let refugees enter their countries as tens of thousands have been arriving through Hungary and other Balkan countries.

After a long summer of financial and political upheaval, Greeks will vote next Sunday in the second general election this year. The snap elections were called last month after the resignation of Prime Minister Alexis Tsipras, who came to power in January on a pledge to stop austerity, but capitulated to creditors’ demands after months of negotiations that destabilized the economy and led to the imposition of capital controls on Greek banks.

The worst wildfire in a devastating season in California has destroyed more than 400 homes and businesses and forced 10,000 people to flee — some with only minutes to escape. At least one person was known dead and four firefighters were taken to the hospital after battling the Valley Fire, which has scorched about 62,000 acres, about 50 miles west  of Sacramento. The blaze broke out Saturday, and as of this morning, it was declared zero percent contained.

Whole blocks were destroyed in the town of Middletown. Governor Jerry Brown declared a state of emergency in areas ravaged by the blaze, and officials expanded mandatory evacuations. There are actually 3 major blazes that have consumed a combined 270,000 acres, and they remain largely out of control.

One reason why this wildfire season has been so difficult is because the state is still in an extreme drought. A new study published online says the Sierra Nevada mountain range is experiencing the lowest snowpack in 500 years.  The shrinking snow levels, linked to the state’s devastating drought, will likely take a toll on the water supplies of farms and cities, reduce the amount of hydroelectric power available, in addition to making wildfires more likely and extreme. California gets 80% of its precipitation during winter, and the Sierra Nevada snowpack plays a vital role, providing 30% of the state’s water supply. At the start of April, the snowpack was just 5% of normal.

Sales of Apple’s new iPhones were on pace to beat the 10 million unit sales it logged during the first weekend of sales last year. Apple (AAPL) did not disclose the specific number of preorders it received. Analysts had expected the company to log about 4.5 million preorders during the first 24 hours, in comparison with 4 million during the first day last year. The iPhone 6S and iPhone 6S Plus will begin shipping Sept. 25.

Airbus, the European airplane maker, formally opened a jet assembly plant in Mobile, Alabama today; its first such factory in the United States. The move into the heart of Boeing’s home turf is part of a long-term strategy by Airbus (EADSF) aimed at doubling its share of the American market for 150-seat airplanes, which is currently dominated by Boeing’s top-selling 737. Airbus plans to build as many as 36 of its competing A320 and A321 models a year by 2018 and says the Mobile plant has the capacity to double that production.

Mylan NV said it launched a tender offer to acquire fellow generic drugmaker Perrigo for about $27 billion – an offer Perrigo has rejected so far. Perrigo urged shareholders to take no action, pending a board review.

Solera Holdings (SLH), which provides technology services and software to insurance companies, said it agreed to be acquired by an affiliate of private-equity firm Vista Equity Partners for $3.74 billion in cash.

Deutsche Bank (DB) aims to cut roughly 23,000 jobs, or about one quarter of total staff, through layoffs mainly in technology activities and by spinning off its PostBank division.

Large banks are preparing to pay $1.8 billion to settle accusations that they conspired unfairly to control credit default swaps derivatives market; CDS is a type of financial contract that allows investors to speculate and hedge against losses and that figured prominently in the crisis. Lawyers for several large investors, including a Los Angeles pension fund, argued in a suit filed in 2013 that the 12 banks — essentially all the largest ones in the world — conspired to keep competitors out of the market, allowing the banks to charge higher prices.

According to a new study by three academics at the University of Notre Dame, there is a correlation between generous stock option grants for executive pay and the incidence of serious product recalls. The study looked at the size of stock options in proportion to a chief executive’s total pay and calculated a two-year average, finding that recalls tended to be more prevalent at companies with higher option payouts. Stock options carry little downside risk if the company’s underlying shares fall but outsized upside if the underlying shares rise; so, an options package can lead to extra risk taking among executives.

Fiat Chrysler CEO Sergio Marchionne has canceled plans to attend the Frankfurt International Motor Show in Germany tomorrow, possibly an indication that the company may be getting close to a contract agreement with the United Auto Workers union. The company says Marchionne is staying in the U.S. to deal with business matters but gave no further details. The union said Sunday that it had picked Fiat Chrysler as its target company in the contract talks. Deals with Fiat Chrysler (FCAU), Ford (F) and General Motors (GM) expire at midnight.

The average price of a gallon of gasoline in the United States fell 27 cents in the past three weeks as refiners and retailers gave up some of their profits margins to sell more fuel. According to the Lundberg survey, regular grade gasoline fell to $2.44 per gallon in the Sept. 11 survey from $2.71 on Aug. 21. Part of the reason for the

The Organization of the Petroleum Exporting Countries, OPEC, has given the clearest signal yet that it believes it is winning its oil price war with the US shale industry. The oil cartel says that output from outside the cartel in 2016 will be over 100,000 barrels per day lower than it had previously predicted, as lower prices shut down more production. In its closely-watched monthly market report, OPEC said: “There are signs that US production has started to respond to reduced investment and activity. Indeed, all eyes are on how quickly US production falls.”

The report said that the number of oil drilling rigs in the US declined in the week ending September 4, down by 13 units to 662 rigs. The overall rig count in the US – which is seen as a key barometer for the industry – is now down 864 units year-on-year. But OPEC did not go as far as the International Energy Agency, which on Friday said lower oil prices would force non-OPEC to cut output by the steepest rate in more than two decades next year.

US shale oil producers could also be more resilient than they appear despite high levels of indebtedness. Around 4,000 untapped wells have been drilled in the country waiting to be fracked, and are able to start producing in a matter of weeks if conditions improve. If prices go up, they’ll get back in the field and start pumping. The price decline certainly has an impact but the demise of US oil producers might be a stretch.

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