Tech stocks got slammed, bank stocks got slammed, Greek stocks got slammed, and gold (!) rallied to start the trading week.
Stocks in Europe got buried on Monday and US equities followed their lead, opening sharply lower and finding no bounce during the day.
First, the scoreboard:
- Dow: 16,020, -210, (-1.2%)
- S&P 500: 1,851, -28, (-1.5%)
- Nasdaq: 4,278, -86, (-2%)
- WTI crude oil: $30.10, -2.5%
Stocks got slammed on Monday (note: this is an improvement over the “absolutely destroyed” language originally warranted) with the Dow falling about 200 points, the S&P 500 losing more than 1.3%, and the Nasdaq falling by more than 1.8%.
The so-called FANG stocks — or Facebook, Amazon, Netflix, and Google — got hammered early on Monday as the high-profile tech leaders from 2015 continue to remain a focus for the market that is looking for direction and not seeing anything encouraging as last year’s leaders get sold relentlessly. Facebook shares lost 4% on Monday, Amazon fell about 3%. Netflix and Google (sorry, Alphabet), finished fractionally higher.
This drop in tech stocks followed the truly stunning 45% decline in LinkedIn shares on Friday which followed a disappointing quarterly report from the professional social network.
Yelp reported earnings during the day on Monday in a release the company said was accidentally distributed by PR Newswire and although its results were in-line with expectations, Yelp shares lost 12% on Monday. Yelp shares, we’d note, had been down by about this much before the earnings leaked, and so the reaction to these numbers was basically nothing from the market.
“Sell (almost) everything” was more or less the day’s theme as it seems to have been for much of the year.
Related: stocks have lost over $6 trillion in value this year alone.
As market rallies get tired and investors start looking for the cracks in the foundation ever-more-complex financial products seem to emerge from the woodwork.
Enter contingent convertible capital instruments, or “CoCos.”
CoCos are junior bonds issued largely by European banks as a way to meet regulatory capital requirements.
The Bank for International Settlements has a great primer on the topic which was widely circulated on Monday as questions swirled about some of Deutsche Bank’s CoCo’s. The simplest way to think about them is like this: a CoCo is a bond that can become either become stock or have its value written down when the issuer’s capital falls below a certain level. Said another way, CoCos are loss-absorbing capital.
Here’s a nice flowchart:
In the case of Deutsche Bank’s CoCo in question, for example, the bond carried a coupon of 7.5% paid in perpetuity. Questions arose about the firm’s ability to continue paying this coupon beyond 2016, with a report from CreditSights casting doubt on the bank’s ability to make payments as soon as next year.
In a statement Deutsche Bank said, it expects to have €1 billion available for CoCo payments this year, more than enough to meet its April obligation, and will have €4.3 billion available next year. How large the firm’s CoCo obligation will be next year is less clear.
Also, the first rule of Additional Tier 1 payment capacities is that you don’t talk about Additional Tier 1 payment capacities. (Not actually.)
So but the point here is that most people woke up on Monday and hadn’t heard of CoCos but then spent a lot of the day reading or thinking about them. Which is sort of how things go in markets: one day your capital structure is followed only by regulators, analysts, some focused shareholders, and your board. The next day, we’re writing about it.
In a statement on Monday following the news, which was first reported by Debtwire, the company said it, “has no plans to pursue bankruptcy and is aggressively seeking to maximise value for all shareholders.”
Chesapeake also noted that Kirkland & Ellis, the firm Debtwire reported had been brought on to restructure its debt, has served as counsel since 2010.
Chesapeake shares are down about 90% in the last year and as oil prices — which fell another 3% on Monday to trade back below $30 a barrel — continue to trade at a massive discount to prices about 18 months ago the market is still waiting for the first big oil bust bankruptcy.
Greek stocks crashed on Monday as the Athens Stock Exchange closed at its lowest level since 1990 after falling 7.9% on Monday alone.
Greek bank stocks bore the brunt of this decline, falling 24.3%.
And so not only has been some time since we last heard from Greece but the whole idea is that the latest bailout agreed to last summer had gotten the whole thing fixed. Obviously not.
Right now Greece is facing an increasingly untenable situation on the ground as its government continues to negotiation with international creditors — including the ECB and the IMF — over measures including pension reform and there are growing concerns these talks could stall. Meanwhile, Greece’s citizens aren’t happy about this austerity push, meaning that even if Greece’s talks at the international level go well any agreements could stoke further discontent at home.
Rock, hard place.
It’s a pretty quiet week for the US economy with Fed chair Janet Yellen’s appearance on Capitol Hill Wednesday and Thursday serving as the main event. Markets will look for any clues about the Chair’s feeling on whether the Fed will be inclined to raise rates at its March meeting, though economists — not to mention the market — see this as increasingly unlikely.
Joe LaVorgna, chief economist at Deutsche Bank, wrote in a note to clients over the weekend that March is decidedly off the table, adding that the Fed won’t be raising rates until December 2016.
“We do not expect the Fed to raise rates in March because Q1 GDP growth will likely be very soft, and policymakers will need more time to gauge whether financial conditions will weigh more extensively on economic activity,” LaVorgna wrote. “A rate hike in June or September would probably require growth and inflation to rebound much more than we currently project. Therefore, a rate hike in December seems most likely.”
LaVorgna also expects the economy will grow 1.3% in 2016, less than the 2% he had been expecting.
Contra LaVorgna’s downgraded outlook, Neil Dutta at Renaissance Macro said that in his view economic data points to conditions that are likely to be more inflationary than most Wall Street forecasters are expecting.
“If we take the data at face value, productivity growth is anemic,” Dutta wrote. “Weak productivity growth with an economy at or near full employment is inflationary, speeding the Fed up, not slowing it down. My view is that forecasts for delayed tightening should be made on risk management grounds not economic ones.”
This is more or less the “third mandate” or “financial stability” argument that in addition to working towards full employment and price stability the Fed ought not to be the source of major market events.
The stock market is not the economy
David Rosenberg at Gluskin Sheff wrote in a note to clients on Monday that, “what is bothering the stock market these days has little to do with the economy — despite the constant narrative to the contrary.”
This pushes back on a popular pro-recession narrative that falling stock prices will hurt consumer confidence, leading to consumers re-trenching, economic activity seizing up, and a market foretold prophecy coming true.
Rosenberg isn’t so sure. And in fact, he’s pretty sure the market has itself confused anyway.
“Think about it,” Rosenberg wrote. “The two best performing assets classes this year are bonds — a hedge against deflation — and gold — a classic hedge against inflation. No wonder the stock market is having a fit — deflation hits profits hard; inflation brings the Fed back into play.”
And so investors seem to be most worked up about about two distinct issues both of which have wildly different implications for the actual economy though neither of which appear to be credible responses to any economic changes. The January jobs report showed a labour market in the US that remains in solid shape while GDP growth continues to be of the not-great-but-not-terrible variety.
Bill Ackman will host yet another webcast about Herbalife on Tuesday.
Verizon is thinking about buying Yahoo and Tim Armstrong — who is in charge of AOL and like Yahoo CEO Marissa Mayer is a Google alum — is leading the talks.
David Zervos thinks Mario Draghi is going to need a much bigger bazooka.
Here’s an idea about why Cam Newton was so upset last night.
The Clinton campaign might get a staff shake-up after Tuesday’s New Hampshire primary.
NOW WATCH: Here’s the question that prompted Cam Newton to storm out of his postgame press conference
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