Trump-Xi trade armistice clears way for more market gains

FILE PHOTO: U.S. President Donald Trump and China's President Xi Jinping shake hands after making joint statements at the Great Hall of the People in Beijing, China, November 9, 2017. REUTERS/Damir Sagolj/File Photo

By Jonathan Spicer and Lewis Krauskopf

NEW YORK (Reuters) – One of the darkest clouds hanging over Wall Street somewhat dissipated on the weekend when China and the United States agreed to shelve any new tariffs and reset discussions, at least temporarily halting an increase in their tensions over trade.

Investors said the agreement, lasting 90 days, between Chinese President Xi Jinping and U.S. President Donald Trump at the G20 summit, spelled a reprieve for stocks and could pave the way for a positive bookend to a volatile trading year.

U.S. stock index futures jumped as trading for the week began late on Sunday, with benchmark S&P 500 e-mini futures up 1.55 percent. Treasury futures were soft, suggesting an appetite for risk-taking could extend last week’s gains in the stock market.

The trade tension between Washington and Beijing, along with an uncertain outlook for U.S. rate hikes, have for months dogged prospects for equities. The U.S. pledge not to boost tariffs on $200 billion of Chinese goods could mark the most important deal in years between the world’s top two economies.

“It sets a pretty positive tone (and) stocks should have a decent rally into December,” said Nathan Thooft, Boston-based global head of asset allocation for Manulife Asset Management.

Thooft said he believed the Trump administration was using a threat to raise tariffs to 25 percent on Jan. 1, from 10 percent now as a negotiating tactic. “So when you start to see evidence that there is the ability to come to some type of agreement, that has to be viewed as a positive,” he said.

The stock market logged an official correction after a selloff in October and continued volatility in November that, just over a week ago, had left the benchmark S&P 500  stock index down 10 percent from its all-time high.

Markets rebounded last week on comments perceived as dovish from Federal Reserve Chair Jerome Powell, though the S&P was up only 2.4 percent in 2018.

The latest trade standoff began in September when the United States imposed the 10-percent tariffs, prompting China to respond with its own. Ahead of the leaders’ dinner in Argentina, investors had been bracing for a range of outcomes including a worse-case end to talks and more tit-for-tat measures that would have continued to crimp economic and corporate profit growth.

Instead, the Americans and Chinese officially lauded the result.

Beijing agreed to buy what the White House called a “very substantial” amount of agriculture, energy, industrial and other products. While the clock ticks on the 90-day tariff reprieve, the two sides will try to work out thorny issues including technology transfer, intellectual property and cyber theft.

“It’s not solved by any stretch of the imagination,” said Thooft. But risk assets and cyclical U.S. sectors like materials and industrials should benefit, he said on Sunday.

An initial jump late on Sunday of nearly 2 percent in Nasdaq 100 e-mini futures suggested that technology companies, many of which were hardest hit in the selloff, could rebound.

Gary Shapiro, CEO of the Consumer Technology Association, said he was encouraged by the trade talks and warned that raising tariffs to 25 percent as the White House had threatened “would likely hurt consumers, put several American companies out of business and displace thousands of American workers.”

POWELL TESTIMONY

Energy prices could also rebound on Monday since cooling trade tensions could boost the world economy and spur demand.

Oil prices had dropped from a four-year high of about $76 per barrel in early October to just above $50 on Friday. But U.S. crude oil was up 2.7 percent to $52.37 a barrel as of 6:07 p.m. EST (2307 GMT) on Sunday.

Aside from trade policy, Wall Street’s attention has also been trained on Fed policy.

Powell was scheduled to testify on Wednesday to a congressional Joint Economic Committee. But the hearing is expected to be postponed to Thursday because major exchanges will be closed on Wednesday in honor of former U.S. President George H.W. Bush, who died on Friday at the age of 94.

Last week, Powell backed the Fed’s gradual tightening but said its policy rate was “just below” a range of estimates of the so-called neutral level that neither stimulates nor cools growth. In response, stocks shot up and largely recovered November’s earlier losses.

In the wake of Powell’s speech, Nicholas Colas, co-founder of DataTrek Research, said: “what happens in Buenos Aires will determine if stocks post a positive 2018.”

The specter of a global trade war has hovered over the market since March when Trump announced tariffs on imported steel and aluminum. He also recently said the United States was studying auto tariffs, which could ripple through Europe and Japan, while a pact with Canada and Mexico left some investors heartened about potential progress with China.

Nancy Lazar, economist at research firm Cornerstone Macro, said in a note that the 90-day tariff delay and China’s “incremental concessions” are good news.

“But given the stern U.S. stance, we’re certainly not raising our outlook,” she said of a 2.8-percent growth estimate for the fourth quarter, still comfortably above potential.

With U.S. corporate leaders increasingly voicing concerns over rising costs associated with tariffs, Wall Street appeared set on Monday to welcome any development that eases those pressures.

(Reporting by Jonathan Spicer and Lewis Krauskopf; Editing by Grant McCool and Sandra Maler)

Firepower for U.S. stocks may lose spark as Democrats gain clout

FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., October 11, 2018. REUTERS/Brendan McDermid/File Photo

By Lewis Krauskopf

NEW YORK (Reuters) – The U.S. stock market may be facing the remainder of Donald Trump’s presidential term with the prospect of less juice to supercharge it.

Stock returns have been fueled the past year by Trump’s corporate tax cuts, which have pumped up profits. Yet, any hope of further fiscal stimulus in the form of more tax cuts faded with the results of Tuesday’s congressional elections, with Democrats taking control of the House of Representatives from Trump’s Republican party.

“The return to political gridlock in Washington will likely serve to temper growth expectations, or at least moderate the prospect of additional stimulative fiscal policy,” said Jon Hill, US Rates Strategist at BMO Capital Markets in New York.

The election comes as the market is also losing the low-rate monetary policy that has supported equities during its near decade-long bull run, as the Federal Reserve is raising interest rates to stave off inflation.

Without both fiscal and monetary stimulus, Wall Street performance will depend even more on fundamental factors at a time investors are looking for signs pointing to when the long economic expansion will finally end.

“This is really not a stock market that needs more fiscal stimulus and I think in order for the bull market to continue what it really needs is strong earnings in the face of what is likely to be increasing interest rates,” said Rick Meckler, partner at Cherry Lane Investments, in New Vernon, New Jersey.

Indeed, some investors may see a silver lining in the diminished prospects for more tax cuts, given concerns about the ballooning deficit and even higher interest rates.

“If the Republicans swept today, you would get more fiscal stimulus but that also would likely result in higher interest rates and the Fed moving potentially faster,” said Keith Lerner, chief market strategist at SunTrust Advisory Services in Atlanta. “So beyond the initial positive reaction, my sense is that there would be some offsets from higher interest rates.”

At the same time, the potential for some fiscal stimulus is still alive through an infrastructure spending package, an area where analysts say Trump and Democrats could find common ground and where an agreement could boost stocks, particularly shares in construction and materials companies.

HEADWINDS AHEAD

Tuesday’s result of a split Congress, with Republicans keeping control of the Senate, was the most likely scenario projected by polling data and prediction markets ahead of the elections and had been anticipated by investors.

Immediate market moves to the news may be misleading. Two years ago, stocks futures plunged when it became clear that Trump would win the presidency, only for them to reverse course within hours.

Stock market gains this year may indeed continue – stocks historically have climbed following midterm elections. For the two calendar years following each national U.S. election, the S&P 500 had a mean annual increase of 12 percent under Republican-controlled governments, compared to an increase of 9 percent for Democratic-controlled governments and a 7 percent rise for gridlocked governments.

Yet replicating the lofty returns of Trump’s first half of his term – the stock market is up 29 percent since his election – may prove elusive.

Democratic control of the House makes the prospect of a new tax-cut package, following the recent steep cut in the U.S. corporate tax rate, appear less likely. Trump has been seeking a 10 percent middle-class tax cut while making permanent individual tax cuts from his 2017 tax overhaul.

The change in House control could bring other challenges for the market.

Trump’s favoring of light regulations for banks and other industries has created a climate that investors say has helped stocks. A Democratic-led House could bring greater oversight on industries such as pharmaceuticals and banks.

With fresh oversight power, Democrats could inspect nearly every aspect of Trump’s presidency from his long-elusive tax returns to possible business ties with Russia and conflicts of interest. In the event the House attempts to impeach Trump, history suggests market volatility could spike, at least in the short term, according to OppenheimerFunds.

But, on the positive side for stocks, analysts doubt Democrats would be able to roll back the heart of the market-friendly changes, including the corporate tax cuts.

The Democrats’ victory in the House could also benefit the market, some investors have said, by tempering Trump’s aims such as on international trade.

Any pressure on stocks could be less severe because the stock market already endured a steep pullback in October from record highs, which some investors in part attribute to jitters over uncertainty about the election.

And some investors will be happy just to move on from the elections.

“It’s one less thing that’s in front of you that you have to worry about,” said Walter Todd, chief investment officer at Greenwood Capital in Greenwood, South Carolina.

(Additional reporting by Jennifer Ablan, Saqib Iqbal Ahmed and Trevor Hunnicutt in New York; Editing by Megan Davies and Frances Kerry)

Two years in, Trump holds stock market bragging rights

U.S. President Donald Trump speaks at a campaign rally on the eve of the U.S. mid-term elections at the Show Me Center in Cape Girardeau, Missouri, U.S., November 5, 2018. REUTERS/Carlos Barria  

By Noel Randewich

SAN FRANCISCO (Reuters) – U.S. President Donald Trump has taken credit for the stock market’s gains during his nearly two years in the White House, and those claims are reasonable given the impact of tax cuts and pro-business policies on investor sentiment.

The S&P 500 has risen 28 percent since Trump’s election in November 2016 to the eve of congressional midterm elections on Tuesday. This surpasses the market’s performance over the same time frame under any other president in the past 64 years. Under President Dwight Eisenhower, the S&P 500 rose 29 percent from his election in November 1952 through November 1954.

Sweeping corporate tax cuts, an initiative driven by Trump, supercharged U.S. companies’ earnings and helped lift the cash-rich technology sector. The Republican party last year passed the biggest overhaul of the U.S. tax code in over 30 years, boosting U.S. corporate earnings.

Still, other sectors that could have been expected to benefit strongly from a Trump presidency have lagged. Indeed, the individual stocks that have gained and lost the most during his reign have little discernable link to Trump’s presidency.

How the market shakes out in the final two years of Trump’s presidency will probably be influenced by Tuesday’s elections. Analysts expect pressure on stocks if Democrats gain control of the House of Representatives and a sharper downward reaction if they sweep the House and Senate.

On the contrary, if Republicans hold their ground, stocks could gain further, with hopes of more tax reform ahead.

Trump’s strong stock market record has been maintained even after a recent pullback on Wall Street as worries about trade battles, inflation, and rising interest rates have increased caution among investors. Starting in 2010 under President Barack Obama as the world recovered from the financial crisis, the S&P 500 has enjoyed its longest bull market in history.

With more than half of Trump’s presidency still to come, how the market will perform over his whole term is unknown. Democratic President Bill Clinton saw the S&P 500 triple during his two terms in the White House.

Average S&P 500 company earnings per share are on track to rise 24 percent this year, the strongest annual gain in eight years, according to IBES data from Refinitiv.

Investor confidence stemming from the tax cuts and Trump’s other business-friendly policies so far have more than made up for ongoing worries on Wall Street that his trade conflict with China is hurting the U.S. economy, and that it could become worse.

The tax cuts also led Apple and other multinationals in the technology sector to repatriate billions of dollars in profits held overseas, some of which went toward buying back stock and sending Wall Street higher.

The S&P 500 information technology index has gained 51 percent since Trump’s election. Financials, which benefited from Trump’s deregulation of the banking industry, have climbed 34 percent since Nov 8, 2016.

Still, some companies that had been expected to boom under Trump have fared poorly. The S&P 500 energy index is flat since Trump’s election, even though crude prices rose over 50 percent during that time and despite Trump putting the brakes on Obama-era policies aimed at reducing the country’s reliance on oil.

Semiconductors have fared better than any other industry group, even though they are highly exposed to China and could become casualties in Trump’s trade war with Beijing.

Along with telecommunications, food and tobacco companies, automakers on average have fared worst among 27 industry group’s since Trump’s election. General Motors Co and Ford Motor Co have been wrestling for years with tepid global demand, with recent signs of a deep slowdown in China.

Industry groups are more detailed categories than the 11 sectors widely tracked on the stock market.

Interest rates, economic growth, company earnings and inflation are widely viewed as strong influences on stock prices, making who holds power in Washington just one of many factors affecting investor sentiment.

Abiomed Inc, the S&P 500’s top performer since Trump’s election, has jumped over 260 percent, helped in part by the success of its Impella heart pumps.

General Electric’s 68 percent loss makes it the S&P 500’s worst performer since Trump was elected. The former industrial powerhouse has foundered in several key markets in recent years and is aggressively cutting costs and selling businesses.

(Reporting by Noel Randewich; Editing by Megan Davies and Cynthia Osterman)

Forget gridlock, Republican win may be better for stock market

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., November 1, 2018. REUTERS/Brendan McDermid

By Noel Randewich

SAN FRANCISCO (Reuters) – U.S. President Donald Trump has warned that his favorite measure of success, the stock market, is imperiled if voters favor Democrats in next week’s congressional elections.

While not fully accurate – stocks tend to rise regardless of who controls the government – it does bear out that the market has delivered a slightly stronger performance on average when Republicans dominate in Washington.

A Reuters analysis of the past half-century shows stocks fared better in the two calendar years after congressional elections when Republicans control Congress and the presidency than when Democrats controlled the two branches, and at least as well as during times of gridlock. Many investors are now hoping for a continuation of the Republican agenda.

“There is Trump ‘the person’, who is very controversial,” said Stephen Massocca, Senior Vice President at Wedbush Securities in San Francisco. “And there’s also Trump ‘the agenda’. The Trump agenda, the stock market loves. To the extent it continues, the market will like that.”

Republicans traditionally push pro-business policies such as tax cuts and deregulation, which boost stock prices. The market has, on the whole, given Trump a thumbs-up, with the market rising almost 20 percent during his presidency so far.

Polls show strong chances that the Democratic Party may win control of the House of Representatives in the Nov. 6 midterm elections after two years of wielding no practical political power in Washington, with Republicans likely to keep the Senate.

Trump warned in a tweet on Tuesday that a change in Congress would be bad for the market, saying: “If you want your Stocks to go down, I strongly suggest voting Democrat.”

Investors often favor Washington gridlock because it preserves the status quo and reduces uncertainty.

“Traditionally, gridlock is good for the markets. But I think this election is very tricky; I’m not sure that’s the preferred market outcome because a lot of the benefits of the past two years have come from not being in a gridlock environment,” said Mike O’Rourke, Chief Market Strategist at JonesTrading.

Should his fellow Republicans maintain or extend their grip on Congress, Trump may be emboldened to pursue more of his political agenda, including further tax overhauls.

By contrast, Democratic gains that allow the party to control the House of Representatives, and possibly the Senate, could stifle Trump’s policy aims and perhaps lead to attempts to impeach him. It could also lead to resistance to increasing the government’s debt limit next year.

“Our economists believe that two likely consequences of a divided Congress would be an increase in investigations and uncertainty surrounding fiscal deadlines, which could raise equity volatility,” Goldman Sachs said in a report this week.

Over the past 50 years, gridlock has been the norm rather than the exception in Washington, with the presidency and Congress won by one party in just seven out of 25 congressional election year.

Looking at the two calendar years following each congressional election, the S&P 500 had a mean annual increase of 12 percent under Republican-controlled governments, compared to an increase of 9 percent for Democrat-controlled governments and a 7 percent rise for gridlocked governments.

However, using median averages, which exclude outliers, differences are less clear, with the S&P 500 seeing annual increases of 11 percent under Republican-controlled governments and under gridlock, and 10 percent gains under Democrat-controlled governments.

An analysis by BTIG brokerage of data going back to 1928 also indicates gridlock is not necessarily ideal. It showed U.S. stocks performing better under united governments.

“While government control is by no means the sole determinant of market performance, investors clearly favor a unified regime,” BTIG strategist Julian Emanuel wrote in his report.

Interest rates, economic growth, company earnings and inflation are widely viewed as strong influences on stock prices, making the balance of power in Washington just one of many factors affecting investor sentiment.

Two Democratic presidents – Bill Clinton and Barack Obama – have presided over the strongest S&P 500 performances http://tmsnrt.rs/2jtEpzi since 1952, with gains of 208 percent and 166 percent, respectively.

Wall Street has applauded Trump since he took power in January 2017 and quickly pushed through measures to deregulate banks and other companies. Last December, his Republican party passed sweeping corporate tax cuts that have S&P 500 companies on track this year to grow their earnings per share by over 20 percent, the biggest jump since 2010, according to Refinitiv IBES data.

“Volatility may rise regardless of the outcome, but, based on historical relationships, equities may be more likely to rise if Republicans manage to maintain control of Congress,” Deutsche Bank said in a recent report.

(Reporting by Noel Randewich; Editing by James Dalgleish)

Wall Street enters third day of gains as trade fears ease

FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., July 6, 2018. REUTERS/Brendan McDermid

By Sruthi Shankar

(Reuters) – U.S. stocks rose on Monday, with bank stocks leading third day of gains in a row after strong U.S. jobs data from last week helped investors brush aside trade concerns.

The S&P financial index rose 1.3 percent, providing the biggest boost to the main S&P index. But gains were widespread, with technology, energy, industrials, consumer discretionary and healthcare stocks rising.

The United States and China engaged in tit-for-tat tariffs on Friday, both countries imposing duties worth $34 billion on each others’ goods. But the benchmark S&P 500 closed up 0.84 percent on Friday as many analysts said the move was already priced in, but warned that further escalation could dent the appetite for stocks.

China’s securities regulator said on Sunday it plans to ease restrictions on foreign investment in stocks listed on the Shanghai or Shenzhen exchanges to attract more foreign capital and support the economy.

The sentiment was largely upbeat after Friday’s U.S. payrolls report showed tame wages and more people looking for work, boosting optimism that the Federal Reserve would stay on a path of gradual interest rate increases.

“Last Friday’s gains managed to put a positive patina on what was otherwise a rather unimpressive week for equity investors,” Peter Kenney, senior market strategist at Global Markets Advisory Group in New York, wrote in a note.

“That tone could serve investors well this week as we launch into Q2 earnings season.”

At 9:49 a.m. ET the Dow Jones Industrial Average was up 193.11 points, or 0.79 percent, at 24,649.59, the S&P 500 was up 15.33 points, or 0.56 percent, at 2,775.15 and the Nasdaq Composite was up 46.97 points, or 0.61 percent, at 7,735.36.

All eyes will turn to second-quarter earnings reports, with banks JPMorgan, Wells Fargo and Citigroup scheduled to report on Friday.

S&P 500 companies are expected to report 21 percent growth in earnings per share for the June quarter, according to Thomson Reuters I/B/E/S. But focus will be on any warnings companies might give about the impact of trade tariffs.

U.S.-listed shares of Chinese companies Alibaba, JD.com and Baidu climbed after KeyBanc recommendations on the stocks.

Tesla was up 1.6 percent after automotive news website Electrek reported the company hiked prices of its Model X and S cars by over $20,000 in China due to tariffs.

Groupon jumped 8.8 percent after a Recode report that the daily deals website operator was looking for a buyer.

Advancing issues outnumbered decliners for a 2.53-to-1 ratio on the NYSE and a 2.16-to-1 ratio on the Nasdaq.

The S&P index recorded 17 new 52-week highs and no new lows, while the Nasdaq recorded 97 new highs and six new lows.

(Reporting by Sruthi Shankar in Bengaluru; Editing by Shounak Dasgupta)

South Korean trust in North jumps after feel-good summit

South Korean President Moon Jae-in shakes hands with North Korean leader Kim Jong Un as Kim leaves after a farewell ceremony at the truce village of Panmunjom inside the demilitarized zone separating the two Koreas, South Korea, April 27, 2018. Korea Summit Press Pool/Pool via Reuters

By Hyonhee Shin and Haejin Choi

SEOUL (Reuters) – South Korean trust in North Korea has surged since last week’s feel-good summit at which their leaders declared an end to hostilities and to work towards denuclearization of the peninsula.

A survey taken on Friday, the day North Korean leader Kim Jong Un met South Korean President Moon Jae-in, showed 64.7 percent believe the North will denuclearize and keep peace. Before the summit, only 14.7 percent of those polled said they did, research agency Realmeter said on Monday.

Many South Koreans were struck by the live TV images during the summit of a smiling and joking Kim. Never before had they seen a self-deprecating and witty side to him, admitting that his country’s train system was inferior and promising he wouldn’t wake up Moon any more with early morning missile launches.

Kim seemed markedly different from former North Korean leaders – his father Kim Jong Il and grandfather Kim Il Sung, people on the street in Seoul said on Monday.

“Denuclearizing is definitely possible,” said 41-year-old Kim Jin-han. The North Korean leader “talked about his country’s weaknesses, such as the infrastructure. He was very open about that. This is very different from the previous leaders. So I think he is ready to wholly give up nuclear weapons.”

Kim’s comments about bringing Pyongyang-style cold noodles to the summit banquet clearly captivated many in the South, prompting some to add his face to the photo of a popular app for a food delivery service, holding a bowl of noodles under his arm.

One social media post getting attention said that with a successful summit, South Korea should brace for an onslaught of North Korean beer as the first wave of “cultural aggression”. A parody showed a South Korean news announcer reporting that Kim complaining about watery South Korean beer compared to Taedonggang Beer featured in the background.

South Korea’s stock market got a boost on Monday, lifted by shares of construction companies and train and steel manufacturers on hopes for joint economic projects.

NEXT SUMMIT

A euphoric mood also enveloped the presidential Blue House on Monday as Moon was greeted by cheers and a standing ovation by scores of aides and staff.

“I am confident a new era of peace will unfold on the Korean peninsula,” Moon told his aides, asking them to quickly follow up on the agreements made in Friday’s declaration.

The two sides are technically still at war since their 1950-53 conflict ended in a truce, not a treaty.

Moon’s approval rating after the summit rose to 70 percent, Realmeter said, its highest since mid-January.

Moon also told aides that U.S. President Donald Trump deserved the Nobel Peace Prize for helping to end the standoff with North Korea over its nuclear weapons program, a South Korean official said.

“President Trump should win the Nobel Peace Prize. What we need is only peace,” Moon told aides, according to a Blue House official who briefed the press.

In January, Moon had said Trump “deserves big credit” for bringing about the inter-Korean talks, saying it may have come from “U.S.-led sanctions and pressure.”

Friday’s final declaration, however, leaves many questions unanswered, particularly what “denuclearization” means or how that will be achieved. Much hinges on Kim’s upcoming summit with Trump, who said it could happen in the next three to four weeks.

Any deal with the United States will require that North Korea demonstrate “irreversible” steps to shutting down its nuclear weapons program, U.S. Secretary of State Mike Pompeo said on Sunday.

A flurry of diplomacy is unfolding in the lead-up to that meeting, with China saying it will send the government’s top diplomat, Wang Yi, to North Korea on Wednesday and Thursday this week. China is the North’s main ally.

And over the weekend, South Korea’s spy chief visited Tokyo to brief Prime Minister Shinzo Abe.

NO MORE SPEAKERS

In initial small steps towards reconciliation, South Korea said on Monday it would remove loudspeakers that blared propaganda across the border, while North Korea said it would shift its clocks to align with its southern neighbor.

South Korea turned off the loudspeakers that broadcast a mixture of news, Korean pop songs and criticism of the North Korean regime as a goodwill gesture ahead of the summit. It will begin removing the speakers on Tuesday.

“We see this as the easiest first step to build military trust,” South Korean defense ministry spokeswoman Choi Hyun-soo said. “We are expecting the North’s implementation.”

North Korea will shift its time zone 30 minutes earlier to align with South Korea, starting May 5, state media reported on Monday.

The KCNA dispatch said the decision came after Kim found it “a painful wrench” to see two clocks showing different times on a wall at the summit venue.

The northern time zone was created in 2015 to mark the 70th anniversary of Korea’s liberation from Japanese rule after World War Two. South Korea and Japan are in the same time zone, nine hours ahead of Greenwich Mean Time.

Kim also told Moon during the summit he would soon invite experts and journalists from the United States and South Korea when the country dismantles its Punggye-ri nuclear testing site, the Blue House said on Sunday.

North Korea has conducted all six of its nuclear tests at the site, a series of tunnels dug into the mountains in the northeastern part of the country. Some experts and researchers have speculated that the most recent – and by far largest – blast in September had rendered the entire site unusable.

But Kim said there were two additional, larger tunnels that remain “in very good condition” beyond the existing one, which experts believe may have collapsed.

(Additional reporting by Ju-min Park in SEOUL and Matthew Miller in BEIJING. Writing by Malcolm Foster. Editing by Lincoln Feast and Nick Macfie)

Nasdaq surges at open after strong Amazon, Microsoft earnings

(Reuters) – The tech-heavy Nasdaq opened 1 percent higher on Friday after stellar results from Amazon, Microsoft and Intel, while a 3 percent drop in Exxon weighed on the Dow and S&P.

The Dow Jones Industrial Average rose 19.80 points, or 0.08 percent, at the open to 24,342.14. The S&P 500 opened higher by 8.53 points, or 0.32 percent, at 2,675.47. The Nasdaq Composite gained 76.84 points, or 1.08 percent, to 7,195.52 at the opening bell.

(Reporting by Sruthi Shankar in Bengaluru; Editing by Shounak Dasgupta)

Explainer: Rising U.S. inflation and what it means for markets

A man unloads vegetables at Grand Central Market in Los Angeles, California, March 9, 2015. REUTERS/Lucy Nicholson

By Chuck Mikolajczak and Lucia Mutikani

(Reuters) – U.S. financial markets have been roiled recently by something neither the economy nor investors have had to contend with for the better part of a decade: concerns they may soon have to reckon with rising inflation.

The S&P 500.is down more than 7 percent from its lifetime high hit on Jan. 26 through Feb. 13, after falling as much as 10.2 percent, and yields on the benchmark U.S. 10-year note have climbed to a four-year high, largely due to inflation worries.

What exactly is inflation, aside from a rise in prices for goods and services, and why is it having such a strong influence on markets?

Inflation is measured in a number of ways by various government agencies, and as long as the economy continues to expand it will be a consideration for markets.

Investors will get the latest inflation data on Thursday with the monthly Producer Price Index.

WHAT IS INFLATION AND HOW IS IT MEASURED?

While inflation decreases consumer purchasing power, a certain level of inflation is considered a reflection of a strengthening economy and the impact on consumers can be offset by rising wages.

The U.S. government publishes several inflation measures on a monthly and quarterly basis. The main measures are the Consumer Price Index (CPI) and the personal consumption expenditures (PCE) price indexes. The CPI and PCE are constructed differently and perform differently over time.

The monthly CPI, compiled by the Labor Department’s Bureau of Labor Statistics (BLS), measures the change in prices paid by consumers for goods and services. The BLS data is based on spending patterns of consumers and wage earners, although it excludes rural residents and members of the Armed Forces.

CPI measures the prices that consumers pay for frequently purchased items. The components are weighted to reflect their relative importance, with the weightings derived from household surveys. Some of the components of the CPI basket such as food and energy can be volatile. Stripping out food and energy from the CPI gives us the core CPI, seen as a measure of the underlying inflation trend.

The January reading on consumer prices released on Wednesday showed prices rose more than expected, up 0.5 percent versus the 0.3 percent expectation. The core reading rose 0.3 percent against the 0.2 percent forecast. Both numbers increased from the 0.2 percent reading for December.

Another reading is the Producer Price Index (PPI), which measures prices from the seller’s point of view.

The Federal Reserve, whose mandate includes price stability along with maximum employment, prefers the personal consumption expenditures (PCE) price indexes constructed by the Commerce Department’s Bureau of Economic Analysis. PCE is considered to be more comprehensive because it includes some components that are excluded from the CPI. According to the BEA, the PCE reflects the price of expenditures made by and on behalf of households. Weights are derived from business surveys.

Housing has a greater weighting in the CPI than in the PCE index. The weighting for medical care is greater in the PCE price index than in the CPI. As with CPI, food and energy components of the PCE are volatile. Stripping them out yields the core PCE, which measures the underlying inflation trend. The core PCE is the Fed’s preferred measure for its 2 percent inflation target.

WHAT SPARKED THE RECENT INFLATION WORRY?

The government’s monthly employment report for January, released on Feb. 2, showed wages posted their largest annual gain in more than 8-1/2 years, suggesting the economy was moving closer to full employment and inflation was on the horizon.

If the economy continues to gain momentum, inflation is likely to rise further toward the Fed’s 2 percent target.

There is concern, however, that the recent U.S. tax overhaul by the Trump administration, which slashed the corporate income tax rate and cut personal income tax rates, could cause an economy that may be nearing full capacity to overheat and prompt the Fed to become more aggressive than anticipated in its course of interest rate hikes.

Markets are pricing in an 87.5 percent chance of a quarter-point increase at the U.S. central bank’s next policy meeting in March. The Fed has forecast three hikes this year, after raising rates three times in 2017.

Some market participants are unsure about how swiftly the Fed will react to inflation and market turbulence under its new chair, Jerome Powell. The March meeting will be the first since Powell took over from Janet Yellen. Recent comments from some Fed officials suggested the possibility of more hikes should the economy continue to strengthen.

HOW HAS INFLATION AFFECTED MARKETS?

Many analysts believe the stock market was overdue for a pullback because valuations, as measured against corporate earnings, have been rich by historic standards, and that the employment data showed economic fundamentals underpinning stocks are strong. Inflation has yet to rise to concerning levels, and as long as the pace remains modest, stocks have room to climb.

Healthy economic growth, along with U.S. deficit spending and moves by central banks around the world to lift interest rates from ultra-low levels, has driven U.S. bond yields to a four-year high. Rising yields could dent the attractiveness of high dividend-paying stocks to investors and trigger increased borrowing costs for U.S. companies and households, which could crimp economic growth.

The initial reaction to the CPI data on Wednesday was sharp, with S&P 500 e-mini futures <ESc1> falling to a session low of 2,627 while yields on the benchmark U.S. 10-year note <US10YT=RR> rose as high as 2.891 percent. The dollar initially spiked higher against a basket of major currencies <.DXY> before weakening.

However, stocks recovered and turned positive shortly after the opening bell and yields on the 10-year note eased.

A strengthening currency would normally go hand-in-hand with an improving economy, yet the U.S. dollar is near four-year lows even after a recent uptick. Some of the weakness has been attributed to anticipation of scaling back in stimulus measures by central banks other than the Fed.

If the U.S. economy fails to show any meaningful uptick in inflation as currently feared, that could tie the Fed’s hands when it comes to interest rate hikes and drag the dollar lower.

(Reporting by Chuck Mikolajczak; Additional reporting by Richard Leong; Editing by Alden Bentley and Leslie Adler)

U.S. Stocks plunge in highly volatile trading: S&P 500 erases 2018’s gains

A trader watches his screens on the floor of the New York Stock Exchange in New York, U.S., February 5, 2018.

By Lewis Krauskopf

(Reuters) – U.S. stocks plunged in highly volatile trading on Monday, with the Dow industrials falling nearly 1,600 points during the session, its biggest intraday decline in history, as investors grappled with rising bond yields and potentially firming inflation.

The benchmark S&P 500 and the Dow suffered their biggest percentage drops since August 2011 as a long-awaited pullback from record highs deepened.

The financial, healthcare and industrial sectors fell the most, but declines were spread broadly as all major 11 S&P groups dropped at least 1.7 percent. All 30 of the blue-chip Dow industrial components finished negative.

With Monday’s declines, the S&P 500 erased its gains for 2018 and is now down 0.9 percent in 2018.

Many investors have been bracing for a pullback for months, as the stock market has minted record high after record high with investors encouraged by solid economic data and corporate earnings prospects, the latter bolstered by recently passed U.S. corporate tax cuts.

Friday’s January jobs report sparked worries over inflation and a surge in bond yields, as well as concerns that the Federal Reserve will raise rates at a faster pace than expected.

“The market has had an incredible run,” said Michael O’Rourke, chief market strategist At JonesTrading In Greenwich, Connecticut.

“We have an environment where interest rates are rising. We have a stronger economy so the Fed should continue to tighten … You’re seeing real changes occur and different investments are adjusting to that,” O’Rourke said.

The Dow Jones Industrial Average fell 1,175.21 points, or 4.6 percent, to 24,345.75, the S&P 500 lost 113.19 points, or 4.10 percent, to 2,648.94 and the Nasdaq Composite dropped 273.42 points, or 3.78 percent, to 6,967.53.

The S&P 500 ended 7.8 percent down from its record high on Jan. 26, with the Dow down 8.5 percent over that time.

Even with the sharp declines, stocks finished above their lows touched during the session. At one point, the Dow fell 6.3 percent or 1,597 points, the biggest one-day points loss ever, as it breached both the 25,000 and 24,000 levels during trading.

The stock market has climbed to record peaks since President Donald Trump’s election and remains up 23.8 percent since his victory. Trump has frequently touted the rise of the stock market during his presidency.

As the stock market fell on Monday, the White House said the fundamentals of the U.S. economy are strong.

The CBOE Volatility index, the closely followed measure of expected near-term stock market volatility, jumped 20 points to 30.71, its highest level since August 2015.

Until recently, gains for stocks have come as the market has been relatively subdued, and any declines were met with buyers looking for bargains.

“People who have been buying the dip are now going to be selling the rip,” said Dennis Dick, a proprietary trader at Bright Trading LLC in Las Vegas. “The psychology of the market changed today. It’ll take a while to get that psychology back.”

About 11.5 billion shares changed hands in U.S. exchanges, well above the 7.6 billion daily average over the last 20 sessions.

Declining issues outnumbered advancing ones on the NYSE by a 8.64-to-1 ratio; on Nasdaq, a 6.92-to-1 ratio favored decliners.

The S&P 500 posted 1 new 52-week highs and 38 new lows; the Nasdaq Composite recorded 17 new highs and 164 new lows. 37.32

(Additional reporting by Megan Davies, Sinead Carew, Caroline Valetkevitch and Chuck Mikolajczak in New York, Noel Randewich in San Francisco and Tanya Agrawal in Bengaluru; Editing by Arun Koyyur and Nick Zieminski)

Wall St. set to rise at open as tax reform enters last lap

Wall St. set to rise at open as tax reform enters last lap

By Rama Venkat Raman

(Reuters) – Wall Street was poised to open higher on Thursday, aided by gains for banking shares and news that the Republicans’ tax code overhaul should face final votes in Congress before the year-end.

A final bill could be formally unveiled on Friday, with decisive votes expected next week in both chambers.

On Wednesday, Republicans in the Senate and the House reached a deal on final tax legislation, paving the way for final votes next week on a package that would slash the corporate tax rate to 21 percent.

“We have a pretty positive background, investors are focused on the tax deal that they are closed to an agreement between the House and the Senate,” said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

“It will take some time to go through the details, what that means for specific companies but it’s consistent with the general positive tone.”

Traders also focused on a $52.4 billion stock deal between Walt Disney <DIS.N> and Twenty-First Century Fox <FOXA.O>.

Shares of media baron Rupert Murdoch’s Fox fell marginally in choppy trading after Walt Disney agreed to buy the Fox’s film, television and international businesses. Disney shares were also down 0.9 percent.

Goldman Sachs <GS.N>, JPMorgan <JPM.N>, Wells Fargo <WFC.N> and Bank of America <BAC.N> rose between 0.52 percent and 0.86 percent ahead of market open.

Shares of big banks recovered early in the day from an initial decline after the Federal Reserve raised rates by 25 basis points but kept its outlook for 2018 and 2019 unchanged.

At 8:34 a.m. ET (1334 GMT), Dow e-minis <1YMc1> were up 32 points, or 0.13 percent, with 8,450 contracts changing hands.

S&P 500 e-minis <ESc1> were up 1.5 points, or 0.06 percent, with 69,766 contracts traded.

Nasdaq 100 e-minis <NQc1> were up 6 points, or 0.09 percent, on volume of 7,313 contracts.

U.S. retail sales increased more than expected in November as the holiday shopping season got off to a brisk start, pointing to sustained strength in the economy.

A Commerce Department report showed retail sales rose 0.8 percent in November, while economists polled by Reuters has forecast a 0.3 percent rise.

Among other big movers, Express Scripts <ESRX.O> gained about 2 percent after pharmacy benefit manager forecast full-year 2018 earnings that topped analysts’ expectations.

U.S.-listed shares of Valeant Pharmaceuticals <VRX.N> fell 4.2 percent after JPMorgan cut the stock’s rating to ‘underweight’.

Israel-based drugmaker Teva Pharmaceutical’s <TEVA.N> shares soared 15 percent after the company announced job cuts, asset sale and dividend suspension in an overhaul to pay back debt.

(Reporting by Rama Venkat Raman in Bengaluru; Editing by Arun Koyyur)