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Feb 20, 2020

Europe News: The EU's biggest post-Brexit fight is about to get real

Silvia Amaro

BRUSSELS — Where will the money come from? This is the contentious question that the EU needs to answer every seven years — and this time around, the issue is even more complicated.
The U.K., which has been one of the EU’s key contributors, left the bloc on January 31. Over the last few years its net contribution to the EU has been around £7.8 billion per year and, as such, the U.K.’s departure could leave the group with a shortfall of around £55 billion ($71.3 billion) over the next seven years.
The remaining 27 EU countries are now scratching their heads and trying to find ways to make up the difference. In an emergency meeting Thursday, the bloc’s leaders will seek to agree on its next budget, but there are expected to be long and arduous fights between those paying the highest amounts to the EU and those receiving the most money from it.
“The situation won’t get better over time ... We face between 60 and 75 billion (euro, $64.7-81 billion) gap because of Brexit, we are facing new challenges and new priorities ... and member states have a tight budgetary situation, so realism is needed,” an EU official, who did not want to be named due to being close to the negotiations, told reporters in Brussels Wednesday.
The EU’s budget is used to finance policies across the bloc, ranging from developing rural areas, security and the promotion of human rights. However, EU countries have a hard time figuring out how much money to allocate to the different policy aims.
There are 15 nations that do not want a smaller budget, including countries such as Portugal, Poland, Spain and Greece. This group has been dubbed the Friends of Cohesion, as it opposes cuts to the so-called Cohesion funds — which support members whose gross national income per inhabitant is less than 90% of the EU average.
On the other hand, the Frugal Four, a group made up of Austria, Denmark, Sweden and the Netherlands, believe the EU should cut its budget and allocate more funding to new policy areas, such as technology and climate change.
Speaking in the Portuguese Parliament Tuesday, Prime Minister Antonio Costa called the later group “stingy.”
In an exclusive interview with CNBC, Johannes Hahn, commissioner for the budget and administration, told CNBC that the EU is already “running late” with the process.
“It’s absolutely high time to get the deal. If there is any further significant delay it will have an impact on the start of the programs,” Hahn said in reference to the EU projects that are due to receive funding by the end of the year.
Furthermore, some analysts warned that mishandling the negotiations could boost anti-EU sentiment in various European capitals.
“This is a tragedy,” Friedrich Heinemann, a budget expert at the think tank EconPol Europe, told CNBC Thursday. He said that policymakers should be asking themselves what the region’s biggest challenges are, and that money should be allocated on that basis.
European leaders need a consensus in order to approve the next seven-year spending plan. Once that is achieved, the budget will still have to be green-lit by European lawmakers in a majority vote.
Jorge Nunez Ferrer, from the Brussels-based think tank CEPS, told CNBC that as it stands it will be difficult for the parliament to approve the current spending plans.

Trump ‘should be happy’

Ahead of the leaders’ meeting Thursday, a preliminary proposal seen by CNBC, suggested an increase to 7 billion euros from 0.6 billion euros in the amount allocated to the European Defense Fund — a program designed to increase national investment in defense research and cooperation between national armed forces.
President Donald Trump has often criticized European countries for not paying their fair share towards NATO. When asked if Trump would be upset with European countries for investing more in European defense programs rather than increasing their NATO contributions, Hahn said: “No, if he’s carefully analyzing this, he should be more than happy.”
Hahn explained that the EU wants to streamline different military systems and use those savings to make additional investments in defense.

Market Insider | Biggest Markets Moves: Stocks making the biggest moves in the premarket: ViacomCBS, E-Trade, Zillow, IMAX & more

Peter Schacknow

ake a look at some of the biggest movers in the premarket:

ViacomCBS (VIAC) – In its first earnings report since the merger of Viacom and CBS was completed in December, the company reported quarterly earnings of 97 cents per share, below the consensus estimate of $1.44 a share. Revenue was also below Wall Street forecasts, but ViacomCBS said the quarter was transitional and that the combination will cut expenses by more than expected.
E-Trade Financial (ETFC) – E-Trade agreed to be bought by Morgan Stanley (MS) for $13 billion in stock, representing a value of $58.74 per share based on Morgan Stanley’s Wednesday closing price.
Norwegian Cruise Line (NCLH) – The cruise line operator beat estimates by 3 cents a share, with quarterly earnings of 73 cents per share. Revenue also beat forecasts. Norwegian also said it was unlikely to achieve prior full-year targets due to the impact of the coronavirus, currently estimated at 75 cents per share.
Hormel Foods (HRL) – The food producer reported quarterly profit of 45 cents per share, a penny a share below estimates. Revenue beat Wall Street forecasts. Separately, Hormel announced the acquisition of longtime smoked meats supplier Sadler’s Smokehouse for an undisclosed amount.
Avis Budget (CAR) – Avis Budget reported quarterly profit of 73 cents per share, well above the 50 cents a share consensus estimate. The car rental company’s revenue was above estimates as well. Avis Budget said the quarter was capped by its best-ever December performance in the U.S.
Zillow (Z) – Zillow lost 26 cents per share for the fourth quarter, 9 cents a share less than Wall Street had been expecting. The online real estate company’s revenue was well above estimates, driven by an increase in the number of people using Zillow’s website to buy and sell homes.
IMAX (IMAX) – IMAX beat estimates by 4 cents a share, with quarterly earnings of 35 cents per share. The movie theater operator’s revenue also came in above Street forecasts.
Six Flags (SIX) – The theme park operator posted a quarterly loss compared to a year-ago profit. It also gave a weaker-than-expected earnings outlook for 2020, cut its dividend by nearly 70%, and announced that its chief financial officer plans to retire at the end of August.
UBS (UBS) – UBS named ING CEO Ralph Hamers as its Chief Executive Officer, effective Nov. 1. UBS is the second big Swiss bank to replace its CEO this month, with Credit Suisse (CS) doing so on Feb. 7.
Mosaic (MOS) – Mosaic lost 29 cents per share for the fourth quarter, wider than the 5 cents a share loss predicted by Wall Street. The fertilizer producer’s revenue beat estimates and predicted a rebound in fertilizer demand this year.
General Electric (GE) – GE is seeking new aircraft engine business from Airbus, amid the ongoing issues for major customer Boeing (BA). The Wall Street Journal reports GE is in talks with the European jet maker to design and sell an engine for the newest Airbus widebody jet, the A330neo.
L Brands (LB) – L Brands could announce a deal as soon as today to sell a stake in its Victoria’s Secret business to private-equity firm Sycamore Partners, according to The Wall Street Journal.
MGM Resorts (MGM) – MGM said it was the victim of a data breach, which exposed details of prior guests. The resort operator said no financial or password data was compromised. ZDNet had reported earlier that the details of more than 10.6 million guests were involved. (STMP) – earned $2.12 per share for the fourth quarter, more than double the consensus estimate of $2.03. The postage services provider also saw revenue come in above forecasts, calming fears that the end of its deal with the U.S. Postal Service would severely impact its business.
Teva Pharmaceutical (TEVA) – The drugmaker announced that an experimental treatment for patients with moderate to severe Tourette Syndrome did not meet its primary goal in a trial.

US Markets | Futures Indicator: US futures point to slightly higher open after new record highs on Wall Street

Elliot Smith

U.S. stock index futures are pointing to a slightly higher open on Wall Street Thursday morning after closing at fresh record highs, as investors continue to monitor the global economic impact of the coronavirus outbreak.
At around 2:35 a.m. ET, Dow futures were 22 points higher and pointed to an implied positive open of more than 23 points, while futures on the S&P 500 and Nasdaq were fractionally higher.
Tech shares led the S&P 500 and Nasdaq Composite to new record highs on Wednesday, and some cautious optimism looks set to carry into Thursday’s trade.
China’s National Health Commission on Wednesday reported that 74,576 cases of the new coronavirus have now been confirmed, with 2,118 deaths on the mainland.
S&P Global Ratings warned in a report on Thursday that Chinese lenders could be hit by as much as $1.1 trillion in questionable loans as the coronavirus ripples through China’s economy, while Goldman Sachs has said that markets are underestimating the potential fallout from the outbreak, suggesting the “risks of a correction are high.”
Minutes published Wednesday from the most recent U.S. Federal Reserve meeting showed that policymakers were cautiously optimistic about the prospect of holding interest rates steady this year.
Market focus will also remain attuned to corporate earnings on Thursday, with Domino’s Pizza, Norwegian Cruise Line and ViacomCBS among those reporting before the bell, while Dropbox is set to report after the close of trade.
U.S. jobless claims data for last week is due at 8:30 a.m. ET and January’s leading index reading will be published at 10 a.m. ET.

Feb 19, 2020

Risky Debt: Cracks in the $1.3 trillion auto-finance market aren’t curbing investor demand for risky debt

Joy Wiltermuth

It is boom time for junk-rated slices of subprime auto-bond deals.
Auto-loan delinquencies may have approached crisis-era levels recently, but that hasn’t put the brakes on demand for riskier slices of subprime auto-loan bond deals.
New subprime auto bonds with “junk” BB-ratings have been selling this month at yields as low as 3.5%, versus as high as 9% four years ago, according to bond tracking platform Finsight.
Demand has been so strong for low-rated subprime auto bonds that some investors now feel crowded out.
“Coming into this year, there’s been more cash chasing auto ABS,” said Toby Giordano, a portfolio manager at Braddock Financial in Denver, Colorado, a buyer of BB-rated subprime auto bonds, or asset-backed securities, in recent years.
“This is one area that pricing has tightened in,” he told MarketWatch. “And now that yields reside at 3.5%, there is just more compelling BB-rated paper elsewhere in structured credit.”
Bond yields move in the opposite direction of prices. Investors across fixed-income markets have been on the prowl for higher returns at a time when 10-year Greek government bond yields TMBMKGR-10Y, +0.07%  have plunged below 1%, 10-year U.S. Treasury note yields TMUBMUSD10Y, +0.28%  trade near 1.56% and the cost of U.S. investment-grade companies to borrow in the bond market has slipped to at an all-time low of 2.56%.
This chart from Deutsche Bank research tracks investment-grade bond yields since 1986.
Deutsche Bank Research
Tumbling corporate bond yields
Auto loan bonds differ from corporate or sovereign borrowings since their performance hinges directly on the ability of consumers to repay their debts, rather than a business or government.
Read: Tesla, gold and the dollar soar: An ‘everything rally’ has some stock-market investors fearing how it all ends
Consumers have benefited from a robust labor market, with the unemployment rate hovering near a 50-year low of 3.5%, while income gains have outpaced debt growth, a combination that should bode well for auto lenders, according to a Morningstar DBRS outlook published Wednesday.
But the credit-rating agency also warned that under a recession scenario, subprime auto bonds would be vulnerable to “increased delinquencies on the horizon because these borrowers tend to be more financially stretched and have fewer reserves, if any, than those of their prime counterparts.”
When Flagship Credit Acceptance sold its $355 million subprime auto-loan bond deal in early February, it pooled loans with a weighted average interest rate of 16.09% and average borrower FICO scores of 587, according to Kroll Bond Rating Agency.
Experian, one of the main U.S. credit-reporting bureaus, considers any borrower with a credit score between 580 and 669 to be subprime.
Bond-market investors typically earn higher yields when they buy lower-rated securities that come with higher risks of losses. Investors have been betting on U.S. consumers to continue driving the U.S. economy, which in July entered a record 11th year of expansion.
Federal Reserve officials gave bullish investors more reason to think a recession isn’t in the cards just yet, after the release Wednesday of minutes of the rate-setting Federal Open Market Committee’s January meeting, which signaled that the U.S. economic outlook looked brighter in late January than they had expected.
The minutes also suggested the central bank may be more inclined to ease rates than to raise them in the near term, which helped propel major U.S. equity benchmarks higher Wednesday, including the S&P 500 index SPX, +0.47%  and Nasdaq Composite COMP, +0.87%  , which scored record finishes.
But even with a favorable economic backdrop, recent data on U.S. household debt points a climb in late-stage auto-loan delinquencies.
The Federal Reserve Bank of New York said that 4.9% of the record $1.33 trillion pile of U.S. auto loans were at least 90 days past due in the fourth quarter of 2019, in its latest report on household debt.
That translates to roughly $65 billion of seriously past-due auto loans, a record when factoring in the significant growth of auto financing since the 2007-’08 financial crisis, per Fed data.
So why have investors been chasing the subprime auto-bond rally? For one thing, auto bonds are structured to cushion investors from some level of expected loan delinquencies and losses, which can total as much a 18% of certain subprime auto-loan transactions, according to Moody’s Investors Service.
This week, Moody’s underscored the point in a new report showing it downgraded zero auto bonds over the past 12 months ending Dec. 31, while upgrades were applied to almost 19% of the transactions it supplied with ratings for the same period.

Biggest Analyst Calls of the Day: Here are Wednesday's biggest analyst calls of the day: Tesla, Nvidia, Adobe & more

Michael Bloom

RT: Elon Musk Boring Company 181218
Tesla founder Elon Musk speaks at the unveiling event by “The Boring Company” for the test tunnel of a proposed underground transportation network across Los Angeles County, in Hawthorne, California, December 18, 2018.
Robyn Beck | Pool | Reuters
(This story is for subscribers only.)
Here are the biggest calls on Wall Street on Wednesday:

Piper Sandler raised its price target on Tesla to $928 from $729

Piper raised its price target on Tesla to a Street high and said it thinks the company can have the same success in storage and solar power that it’s had with autos.
“We’re nudging our price target higher after installing a solar system to charge a Model X. Since August 2016, we have been using a Model X SUV in a four-person, single-vehicle household. After logging 53,448 miles and surviving four Minnesota winters, we are convinced that Tesla’s automotive products offer a superior ownership experience. If history is any indication, we’ll eventually be saying something similar about generating and storing our own solar power. But for now we’re increasingly our price target from $729 to $928, which is enough to partially capture TSLA’s solar+storage opportunity in our 20-year DCF.”
Read more about this call here.

Bernstein upgraded Nvidia to ‘outperform’ from ‘market perform’ and raised its price target to $360 from $300

Bernstein raised its price target on Nvidia to a Street high and said the company has upside potential to due to its upcoming product cycles among other things.
“With the stock almost exactly back to prior peak levels, it is obvious that not growing more constructive, sooner, was an error. But while that peak (in hindsight) was built on a shaky foundation, the current situation seems much more stable w/ a ‘clean’ (no crypto) gaming profile, improved Turing traction (& forthcoming new product cycle), & return to hyperscale builds; had these been true 16 months ago we suspect the stock would have continued rising.”
Read more about this call here.

Markets: Goldman says market underestimating coronavirus risk: 'Correction is looking much more probable'

Fred Imbert

Trader on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

Goldman Sachs sounded the alarm on Wednesday to clients about a possible correction in the stock market, noting investors are underestimating how big of a risk the coronavirus really is.
"We believe the greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices, suggesting that the risks of a correction are high," strategist Peter Oppenheimer wrote in a note.
Investors have been grappling with the possible ramifications of the coronavirus outbreak in recent week. But except for a few pullbacks, the major U.S. stock indexes have taken the news in stride. On Wednesday, the S&P 500 and Nasdaq Composite jumped to record highs. Oppenheimer thinks the market could be in trouble if earnings expectations aren't ratcheted down.
"Equity markets are looking increasingly exposed to near-term downward surprises to earnings growth," Oppenheimer said. "While a sustained bear market does not look likely, a near-term correction is looking much more probable."
— CNBC's Michael Bloom contributed to this report.