Daily Agenda: European Data Reveals Resilience

Brexit jitters have not shaken confidence in Eurozone; China to boost foreign investment; Kobe Bryant in new VC firm; Monsanto, Bayer deal may be on track.


Preliminary purchasing-manager index data for August released today by Markit indicates that Europe’s economy continues to show resilience in aggregate while some regional divergences remain. Composite readings for the common-currency zone registered stronger-than-consensus forecasts at 53.3, the second consecutive expansion, while manufacturing for the group was slightly softer than forecast. For investors nervous over the impact of the United Kingdom’s decision to leave the European Union, the data provides an indication that stimulus measures by the European Central Bank may have provided a cushion. As has been the case during the entire post-recovery period, some economies continue to lag in some activity measures. French manufacturing activity remained in a contractionary level at 48.5—softer than the forecast 48.8 and weaker than July’s final reading. France’s composite readings still managed to beat forecasts on the strength of the service sector. While good news for the region, allocators may now shift focus on what sustained strength will mean for future policy actions by the ECB.

Toll Brothers beat sales estimates. Financial results issued earlier today by residential-construction company Toll Brothers included a 58 percent year-over-year gain in earnings during the fiscal third quarter, a signal that demand in the U.S. for big-ticket new homes remains strong. Net income for the period registered at 0.61 per share as revenues expanded by 24 percent versus the same period last year. Critically, new home orders rose by 18 percent, putting the company on track to produce more than 6,000 home in fiscal 2016. Year to date the company’s shares have underperformed peers by almost 12 percent.

China moves towards increased FDI. In comments on Tuesday, China’s Vice Minister of Commerce Wang Shouwen stated that the country will continue to expand opportunities for direct foreign investment with a focus on increasing the flow of outside capital to inland and western regions. The minister did not discuss opening new industries specifically. Under current regulations, certain industries, including communications and banking, are closed to offshore investors.

DOJ ordered to process newly discovered Clinton emails quickly. On Monday, a decision by the United States District Court for the District of Columbia imposed a September 22 deadline for the Department of Justice to review the nearly 15,000 newly discovered emails from private servers operated by the Democratic presidential candidate during her tenure as secretary of state. Separately, Clinton Foundation emails released the same day as a result of a Freedom of Information Act request suggested that high-level donors to the foundation attempted to gain direct access to the secretary via backchannel communications.

NBA star, tech star to launch VC firm. On Monday, retired professional basketball great Kobe Bryant and tech entrepreneur Jeff Stibel announced the creation of a venture capital firm initially capitalized at $100 million. The new company, Bryant Stibel, will be based in Los Angeles and will not initially seek outside capital. The initial firm portfolio will include investments made jointly by the two friend in recent years. The focus of future investments will be technology and media startups.

Bayer, Monsanto reportedly nearing deal. On Tuesday, Bloomberg News reported that Bayer and Monsanto are nearing a final agreement to merge after the St. Louis agrichemical giant rejected initial bids by the German firm in May and July. Citing anonymous sources, the report indicates a walkaway fee of $1.5 billion for Monsanto if the deal is not concluded successfully. If completed, the merger would create the largest seed and pesticide producer globally.


Turkey cuts rates as expected. The Central Bank of the Republic of Turkey on Tuesday announced a 25 basis point cut in the benchmark overnight-lending rate to 8.5 percent in line with consensus expectations. Bank President Murat Çetinkaya and his colleagues have lowered the overnight rate by 2.25 percent since March. After a rebound in the Turkish lira following an unsuccessful military coup last month, markets had anticipated easing measures by the central bank to help stimulate growth despite a third consecutive monthly expansion in consumer inflation in July.

Portfolio Perspective: Time to Consider Hedging?

A sure-fire way to get a laugh out of equity portfolio managers these days is to recommend hedges. Even in the event of a pullback —and recall that in August 2015 and January/February of this year, the Standard & Poor’s 500 index dropped more than 11 percent—a quick recovery seems virtually assured. Of course, we think this mindset belies actual market risk, particularly as the seasonally volatile fall approaches.

One structure that can bridge the gap between distaste for deploying any capital for hedging purposes and managing potential market risk over the next few months are collars (or put-spread collars). While the SPX is up 6.8 percent year to date, 77 components have gained more than 25 percent. It seems obvious to us that there are unrealized gains worth protecting.

Jim Strugger is a managing director and derivatives strategist for MKM Partners in Stamford, Connecticut.