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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Markets Rise as Hong Kong Tensions Ease

2. U.K. Lawmakers Vote to Block No-Deal Brexit

3. The Federal Reserve Stays on Message

4. The U.S. Stands Alone in a 2% World

5. Google Fined by the FTC

Markets Closed

Dow
26,355.47 +0.91%

S&P
2,937.78 +1.08%

Nasdaq
7,976.88 +1.30%

VIX
17.33 -11.85%

Bitcoin
$10,635.45 -0.44%

US 10-Yr Yield
1.459 -0.4775%

Credits: REUTERS/Patrick Fallon

Markets Today

U.S. markets rebound as China tensions with Hong Kong ease
U.K. lawmakers block Johnson's "Hard Brexit" plan

In a bit of a bounce-back rally, U.S. markets traded higher all day as good news out of the East calmed investors, for a change.

The Caixin/Markit Services Purchasing Managers' Index (PMI), which surveys China-based manufacturers on upcoming orders, came in at 52.1 in August—its highest reading since May. That may have quieted fears—for a day—about the health of China's manufacturing sector.

Carrie Lam, the administrator overseeing Hong Kong, announced that she would be rescinding the extradition bill that was at the heart of the protests in the territory. The extradition bill would have allowed China to extradite criminal suspects from Hong Kong to face trial on the mainland, which many Hong Kong'ers viewed as an overreach of legal authority and power.

The Hang Seng Index in Hong Kong climbed around 4% on reports overnight that the withdrawal of the bill was imminent. The iShares MSCI Hong Kong ETF (EWH) gained 4.4%. That ETF has been good proxy for the conflict in Hong Kong, which is one of the key financial centers on the planet.

Here's EWH over the past three months:

Meanwhile, in London...

PM Johnson loses a key vote and more support
The Oct. 31 Brexit deadline may be pushed back, again

An alliance of lawmakers across the U.K.'s political parties handed British Prime Minister Boris Johnson another defeat in parliament on Wednesday, preventing him from taking the country out of the European Union without a formal agreement on Oct. 31, in what is known as a "Hard Brexit."

Per the BBC, the bill forces the PM to ask for an extension beyond the Oct. 31 Brexit deadline if a deal has not been agreed with the EU. Johnson pushed for an immediate vote on an early general election later today, but that too, was blocked.

Johnson now has to ask the European Union for an extension to the Oct. 31 Brexit deadline—something he really didn't want to do. A hard Brexit, wherein the the U.K. leaves the EU without a deal, looks unlikely, which may be a benefit to the U.K. economy.

A new report, from a research group called The UK in a Changing Europe, which bills itself as nonpartisan, lists some of the potential fallout from a hard Brexit. Here are a few worth noting:

Half of U.K. produced goods will face disruption
Northern Ireland would be particularly badly hit
Any deal with the EU after no deal would be much more difficult
The impact on trade would be immediate
Sterling would almost certainly fall further
Traders from Northern Ireland crossing the Irish border would face an increased burden
Given current trends, the U.K. economy could fall into recession, although its depth and severity would be uncertain
WTO terms would mean the U.K. economy growing more slowly. Per capita income could fall between 4–9% over the next decade

At this point, there is way too much going on inside the U.K.'s Parliament to know how this will play out, but the U.K. has a lot of trade at stake with other European countries that could be impacted by what happens over the next 48 hours.

chart courtesy BBC

The Federal Reserve Stays on Message

Fed presidents deliver speeches preaching support for the economy
Next meeting is Sept 18–19

Back on this side of the pond, there were no Fed meetings today or this week, but various Fed presidents are making the rounds on the speaking circuit, and they are all singing from the same song book.

NY Federal Reserve President John Williams, one of the more influential members of the Federal Open Market Committee that sets interest rates, delivered a speech today reiterating the points that Fed Chair Jay Powell has made at recent Fed meetings:

Inflation remains stubbornly low (below the 2% Fed target)
The U.S. China trade war has added more uncertainty to an already economically fragile world
The Fed will be supportive and do what is needed to support the economic expansion

While it's not worth trying to read between the lines, it is important to note that members of the Fed appear unified in the face of economic cross-currents and almost daily admonishments from President Trump.

The FOMC meets next on interest rates on Sept. 18 and 19, and options traders have placed a 96% probability on another rate cut, per the CME.

We've said it before, but it bears repeating... despite all the economic headwinds facing the U.S. economy, it does remain one of the most stable among developed economies. We've written a lot about developed countries with negative yields like Japan and Switzerland, but the U.S. stands out as the only major developed country that offers Treasury bonds with yields north of 2%. The only one in the world! That is keeping money flowing into the U.S. Treasury despite other slowdowns across the economy.

chart courtesy Bianco Research and Charlie Bilello

Google Facing Fines

It's pocket change by Google standards, but the message behind a recent fine from the Federal Trade Commission is getting attention. Google agreed to pay a record $170 million fine to settle a lawsuit filed by federal and state authorities that charged the internet giant with violating children's privacy on YouTube.

According to the FTC, the settlement requires Google and YouTube to pay $136 million to the FTC and $34 million to New York for allegedly violating the Children's Online Privacy Protection Act (COPPA) Rule. The $136 million penalty is by far the largest amount the FTC has ever obtained in a COPPA case since Congress enacted the law in 1998.

In a complaint filed against the companies, the FTC and New York Attorney General allege that YouTube violated the COPPA Rule by collecting personal information—in the form of persistent identifiers that are used to track users across the Internet—from viewers of child-directed channels, without first notifying parents and getting their consent. YouTube earned millions of dollars by using the identifiers, commonly known as cookies, to deliver targeted ads to viewers of these channels, according to the complaint.

We've known that the U.S. government has been preparing lawsuits and fines against Alphabet/Google, Facebook, Amazon, and Apple for months. Some of those have already been announced, but this is just the beginning of a backlash against the most popular consumer technology and social sites that will bring billions of dollar in fines and changes to the way they operate.

The fines they can handle... but fundamental changes to their business models might be much more disruptive.

More News:

Coupa Software Shares See Big Money Buying in 2019

Why Tesla Still Leads As Global Electric Car Sales Fall For First Time Ever

Lam Research Shares See Big Money Buying

chart courtesy www.koyfin.com

Shares of PVH rose by over 9% today after the CEO bought almost $10 million worth of the company's stock. Ipg Photonics recovered from its losses yesterday—its shares having increased by over 6%—following the release of a 120 page research paper reporting that the fiber laser market is going to see massive growth in 2025.

Shares of Tyson fell by almost 8% today following the CEO's announcement that "discrete challenges," such as a beef plant fire, grain price volatility, and a slowdown of chicken processing caused by a massive recall, will result in the company missing its original profit forecast. Ultra Beauty's stock price decreased by nearly 4% after it was reported that the company trailed behind the market by 32% last month.

Chart of the Day:

It's a throwback Wednesday for us and we are returning with a chart of the day just for fun. The chart above shows technology's share of S&P 500 profits over the past 20 years. We comment a lot on how just a few massive tech stocks like Amazon, Alphabet, Facebook, Microsoft, and Apple are driving the direction of the overall market and price to earnings multiples. This chart puts it into colorful perspective as the light green area, representing technology and ecommerce, has welled over the past decade. Energy and Industrials, the two drivers of the 20th century economic locomotive, have faded as the digital world has transformed the way we live and spend our money.

Edison with his lightbulb, courtesy thoughtco.com

Today in Markets History

Sept. 4, 1882: Thomas Alva Edison opens the Pearl Street Station, the first central generating system, making electric lighting and power possible in New York City—and the world. At 3 p.m., he flips a switch at 23 Wall Street, turning on 106 electric lamps in the offices of his financial backer, J.P. Morgan's investment bank Drexel, Morgan & Co.

Jean Strouse, Morgan: American Financier (Random House, New York, 1999), p. 233