Chinese Lenders Slash Five-Year Loan Prime Rates by 25 Basis Points to 3.95%

Bayer | Capital One/Discover | Proposition 12 | Calif. EV market slows | Investors and U.S. farmland

Jim Wiesemeyer

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February 20, 2024 05:59 AM

Bayer | Capital One/Discover | Proposition 12 | Calif. EV market slows | Investors and U.S. farmland

Today’s Digital Newspaper

MARKET FOCUS

Bayer slashes dividend
Head of Chinese securities pledges to address market concerns promptly
Capital One Financial to acquire Discover Financial Services in $35.3 bil. stock
Goldman Sachs strategists raise their U.S. equity target again
Earnings reports of note this week
Fed speakers on tap this week
Fed rate-cut odds
Ag markets
Investors increasingly pouring funds into U.S. farmland
NWS weather outlook

CONGRESS

Senate returns Feb. 26, and the House comes back Feb. 28.

ISRAEL/HAMAS CONFLICT

U.N. Security Council set to vote on resolution demanding cease-fire in Gaza

POLICY

Podcast: Farm bill, farm income and other policy issues

CHINA

Chinese lenders slash five-year loan prime rates by 25 basis points to 3.95%
Chinese travel and spending surpassed pre-pandemic levels

TRADE POLICY

U.S. requests Mexico probe guacamole plant worker rights

ENERGY & CLIMATE CHANGE

California’s EV market slows amid challenges and concerns
RFA unveils optimistic outlook publication on the ethanol industry’s status

LIVESTOCK, NUTRITION & FOOD INDUSTRY

Moms for America and Texas Ag Commissioner voice opposition against EATS Act

POLITICS & ELECTIONS

President Biden’s re-election campaign boasts substantial $130 million war chest

MARKET FOCUS

— Equities today: Asian and European stock markets were mixed to lower in overnight trading. U.S. stock index futures are set to open lower. As the week begins, a sentiment has emerged among certain participants that stocks are excessively bought in the short term and in need of consolidation. Since late October, the market has experienced a significant upswing, propelling the S&P 500 and the Dow close to record highs.

U.S. equities Friday: All three major U.S. stock indexes fell Friday after wholesale prices came in hotter than expected. On Friday, the Dow ended down 145.13 points, 0.37%, at 38,627.99. The Nasdaq fell 130.52 points, 0.82%, at 15,775.65. The S&P 500 lost 24.16 points, 0.48%, at 5,005.57. Each index ended the week lower, the first weekly decline for any of them since early January.

Dow: -0.1% for the week / +2.5% YTD

Nasdaq: -1.3% for the week / +5.1% YTD

S&P 500: -0.4% for the week / +4.9% YTD

— The newly appointed head of the Chinese securities regulator (CSRC), Wu Qing, has pledged to address market concerns promptly to bolster the country’s capital markets, which have faced significant challenges amid waning investor confidence. In a recent two-day seminar, Wu engaged with various stakeholders, including institutional and retail investors, foreign-funded institutions, and private-equity firms, to gather insights on policies to support the long-term growth of the capital market. This marks Wu’s first interaction with market participants since assuming the role in early February. Recommendations from participants included stricter regulations for new equity offerings and enhanced supervision to elevate the quality of listed companies. Analysts anticipate further policy coordination from the CSRC and other top official agencies in the coming weeks to address market concerns and signal future regulatory directions.

— Bayer plans a drastic 95% dividend cut, aiming to alleviate financial strain from its $63 billion Monsanto acquisition, marked by debt and legal battles over Roundup — the company has been facing thousands of lawsuits claiming that Roundup caused cancer, which it denies. The debt pile of more than €38.7 billion ($41.728 billion), according to a recent filing, is becoming increasingly hard to manage amid growing legal costs and rising interest rates.. Bayer said it will offer investors only the legal minimum required under German law, paying out 11-euro cents ($0.12) per share for 2023, down from €2.40 ($2.59) last year. CEO Bill Anderson, who was brought in last year to try to revive the group, said the decision to only pay out a legal minimum for the next three years “was not taken lightly.” Despite share price gains, the move underscores ongoing challenges. The cut, saving €2.3 billion ($2.5 billion) yearly, is part of broader efforts to tackle debt and bolster flexibility. Analysts predict further strategic actions amidst persistent legal liabilities and operational hurdles.

Of note: Bayer has already pledged to spend as much as $16 billion to resolve Roundup litigation. Bayer is still facing tens of thousands of claims on the matter. Beyond that, Bayer is also dealing with expensive litigation over other Monsanto products.

— Capital One Financial is poised to acquire Discover Financial Services in a $35.3 billion all-stock transaction. Discover shareholders will receive 1.0192 Capital One shares for each Discover share, representing a 26% premium from Discover’s Friday closing price. The merger, expected to finalize in late 2024 or early 2025, will result in Capital One shareholders holding 60% and Discover shareholders owning 40% of the combined entity. By combining two major credit card issuers in the U.S., the deal aims to expand Capital One’s credit card offerings and deposit base. Despite Capital One’s existing usage of Visa and Mastercard networks, it plans to retain the Discover brand, as reported by the Wall Street Journal.

— Earnings reports this week include:

Tuesday: Walmart (expected to post a rise in fourth-quarter sales,) Home Depot (expected to report a drop in its fourth-quarter same-store sales, pinched by slowing demand), Caesars Entertainment, Palo Alto Networks (expected to post higher second quarter revenue, as demand for its cybersecurity solutions surged), and Medtronic (focus is expected to be on sales in its diabetes unit and cardiovascular unit).
Wednesday: Analog Devices, Nvidia (expected to report a three-fold rise in its fourth-quarter revenue), Etsy, Rio Tinto, Marathon Oil, Rivian Automotive (expected to report a rise in fourth-quarter revenue on Wednesday as the demand for its pickup trucks remains resilient amid an industry-wide slowdown), and Lucid Group (expected to report a fall in fourth-quarter revenue as a slowdown in EV demand has dented demand for its line of luxury electric sedans).
Thursday: PG&E, Dominion Energy, Moderna, Intuit, Booking Holdings, Wayfair, and Carvana.
Friday: Warner Bros., Discovery, Bloomin’ Brands, and Ameren.

Of note: Almost 80% of companies in the S&P 500 have reported quarterly results, with 75% reporting earnings above estimates, according to data compiled by FactSet.

— Agriculture markets Friday:

Corn: December corn futures fell 1 1/4 cents to $4.16 1/2, marking a 12 1/2 cent loss on the week.
Soy complex: March soybeans rose 10 cents to $11.72 1/4 but lost 11 1/4 cents on the week. March soymeal rallied $6.10 to $345.60 but fell $1.20 week-over-week. March soyoil fell 41 points to 45.59 cents on the day and 167 points on the week.
Wheat: March SRW wheat futures fell 6 1/2 cents to $5.60 1/2, nearer the daily low and hit a 2.5-month low. For the week, March SRW lost 35 3/4 cents. March HRW wheat futures fell 8 1/2 cents to $5.67 1/4, nearer the daily low and hit another contract low today. For the week, March HRW fell 34 1/4 cents. March spring wheat fell 3 1/4 cents to $6.54 3/4 and gave up 29 1/2 cents on the week.
Cotton: March cotton fell 76 points to 93.87 cents but gathered 209 points on the week.
Cattle: April live cattle futures rose $1.95 to $187.55, nearer the session high and hit a 3.5-month high. For the week, April live cattle gained 87 1/2 cents. March feeder cattle futures gained $2.925 to $251.025, nearer the daily high, hit a four-month high and on the week rose $3.875.
Hogs: Nearby April futures ended Friday at $85.35, up 22.5 cents on the day and $4.075 higher on the week.

— Of note:

Fedspeak. Federal Reserve speakers this week include:

— Wednesday: Fed Governor Michelle Bowman and Atlanta Fed President Raphael Bostic.
— Thursday: Fed Vice Chair Philip Jefferson speaks on the monetary policy outlook; Fed Governor Lisa Cook, Fed Governor Christopher Waller, Minneapolis Fed President Neel Kashkari, and Philadelphia Fed President Patrick Harker.

Goldman Sachs strategists raise their U.S. equity target again. Goldman Sachs strategists, led by David Kostin, have revised their year-end target for the S&P 500 upwards for the second time in about three months. Kostin now anticipates the US benchmark reaching 5,200 by the end of the year, representing a 3.9% increase from Friday’s closing level. This adjustment comes after initially forecasting a year-end target of 4,700 in November, which was later raised to 5,100 in mid-December. The S&P 500 has already surpassed the significant 5,000 milestone this month, driven by heightened profit estimates.

— Fed rate-cut odds:

March 20: 10% chance of quarter-point rate cut vs. 16% on Feb. 9 and 65.1% on Jan. 16.
May 1: 38.4% chance of quarter-point rate cut; 3.2% chance of cumulative 50 basis points. On Jan. 16, investors saw 97.5% odds of at least a quarter-point Fed cut and 60.5% of a cumulative 50 basis points.
June 12: 81.6% chance of quarter-point cut by this point; 27.9% chance of cumulative half-point rate cut. On Jan. 16, markets saw a 100% chance of at least a quarter-point cut, 98% chance of 50 basis points and 68.6% of 75 basis points.
For the full year, markets see an 88.5% chance of 75 basis points of easing, or three quarter-point Fed rate cuts. There’s a 64% chance of 100 basis point. On Jan. 16, markets saw 125 basis points as highly likely, with 42.1% odds of 150 basis points.

Market perspectives:

— Outside markets: The U.S. dollar index is weaker. Nymex crude oil prices are a bit weaker and trading around $78.75 a barrel. The yield on the benchmark 10-year U.S. Treasury note is presently fetching 4.277%.

— Investors are increasingly pouring funds into U.S. farmland, viewing it as a lucrative asset amid population growth and resource scarcity. The value of farmland held by investment groups has more than doubled in the past three years, reaching $16.6 billion by the end of 2023, according to the National Council of Real Estate Investment Fiduciaries (NCREIF). This surge is expected to continue due to climate change and the growing global population. Factors like the Covid-19 pandemic and geopolitical events have further boosted agricultural land’s appeal to investors, with its resilience against inflation highlighted. Despite concerns raised by some farmer organizations regarding the impact on rural communities, institutional investors remain drawn to farmland as a stable long-term investment. Link/paywall for details via the Financial Times.

— NWS weather outlook: Heavy rain and heavy mountain snow in California are expected to become less intense... ...A Moderate Risk of Excessive Rainfall remains in effect along portions of coastal southern California today... ...Warming trend expected to expand from the Great Plains into the Midwest through midweek.

CONGRESS

— The Senate returns Feb. 26, and the House comes back Feb. 28.

ISRAEL/HAMAS CONFLICT

— U.S. will almost certainly veto a Gaza cease-fire proposal put before the United Nationals Security Council on Tuesday. The UN Security Council is set to vote on a resolution demanding an immediate cease-fire in Gaza on Tuesday, but the U.S. said it would veto it because it’s trying to arrange a deal on its own.

POLICY UPDATE

— Farm bill, farm income and other policy issues were discussed with me on Damian Mason’s podcast. Video link | Audio link

CHINA UPDATE

— Chinese lenders slashed their five-year loan prime rates by 25 basis points to 3.95%, the first cut since June and the largest reduction since a revamp of the rate was rolled out in 2019. The rates are used as a reference for mortgages.

Banks also maintained their one-year loan prime rate — the de facto benchmark lending rate — at 3.45%. While expectations for a smaller reduction in the five-year LPR were fairly widespread, economists were split on a one-year LPR cut.

The move failed to impress investors. Bloomberg notes that China’s benchmark CSI 300 Index ended 0.2% higher in what was largely a listless session. The yuan traded both offshore and onshore were little changed after support from state banks earlier in the day. Yields on China’s government bonds — which have been falling on greater bets for easing — slipped 2 basis points to 2.42%.

— During the Lunar New Year holiday, Chinese travel and spending surpassed pre-pandemic levels, indicating a positive trend in consumption. Approximately 474 million tourist trips were taken across the country during the festival, which ran from Feb. 10 to the following Saturday, marking a 19% increase compared to the same period in 2019. Moreover, tourism expenditure during the holiday rose by almost 8% compared to the expenditure recorded in 2019.

TRADE POLICY

— U.S. requests Mexico probe guacamole plant worker rights. The United States has requested (link) Mexico to investigate the worker situation at RV Fresh Foods S.A. de C.V. facility in Uruapan, Michoacán, which produces guacamole. U.S. Trade Representative Katherine Tai announced the request, citing concerns about potential violations of workers’ freedom of association and collective bargaining rights.

As a response to a petition, the U.S. has halted the imposition of tariffs on goods from the facility. This marks the 20th instance of the U.S. invoking the Rapid Response Labor Mechanism (RRM) in the U.S.-Mexico-Canada Agreement (USMCA) and the first time it has done so in the food manufacturing sector.

Tai emphasized the commitment to uphold union democracy principles, empowering workers to utilize freedom of association and collective bargaining. Collaboration with the Mexican government is anticipated to address the issues at hand.

Deputy Undersecretary for International Affairs Thea Lee stressed the importance of respecting workers’ rights, stating that any actions undermining their ability to organize and negotiate collectively contradict the objectives of the USMCA and Mexico’s labor laws.

ENERGY & CLIMATE CHANGE

— California’s EV market slows amid challenges and concerns. The electric vehicle (EV) market in California, after years of rapid growth, is showing signs of slowdown due to various factors such as high vehicle prices, unreliable charging networks, and potential consumer fatigue, particularly towards Tesla and its CEO Elon Musk, according to an article (link) in the Los Angeles Times.

Sales of EVs declined significantly in the last half of 2023, raising concerns about California’s ability to meet its ambitious climate goals, including banning the sale of new gasoline- and diesel-powered vehicles by 2035.

Although EV sales started strong in 2023, with a 48% increase in the first half of the year compared to the previous year, sales dropped in the latter half. Issues such as unreliable public chargers, high vehicle prices, confusing government incentives, and controversial statements from Tesla’s CEO are contributing to the slowdown. Additionally, automakers like Ford and General Motors have temporarily cut back on EV production plans, further impacting the market.

Despite these challenges, momentum behind the EV transition remains strong, with significant investments from manufacturers and government mandates worldwide. However, several obstacles such as unreliable charging infrastructure, insufficient public chargers, high vehicle prices, and confusing incentives continue to hinder widespread EV adoption.

Addressing these challenges will be crucial for the EV market’s sustained growth, with potential solutions including improving charging infrastructure reliability, increasing the number of public chargers, lowering vehicle prices, and simplifying government incentive programs. Additionally, consumer sentiment towards EVs, particularly regarding concerns about affordability and charging convenience, will play a significant role in shaping the future of the EV market in California and beyond.

— The Renewable Fuels Association (RFA) unveiled its optimistic outlook publication (link/pdf) on the ethanol industry’s status as its annual meeting commenced in San Diego. Alongside this release, they also presented a pocket guide (link) and provided links to previous Outlook publications.

According to RFA, the U.S. ethanol industry experienced significant successes in 2023, both in market performance and public policy advancements. The organization highlighted that as 2024 commences, the future appears exceptionally promising for ethanol. RFA emphasized the importance of fortifying existing partnerships, forging new alliances, and nurturing innovative collaborations, strategies they’ve been implementing for over four decades.

LIVESTOCK, NUTRITION & FOOD INDUSTRY

— A group named Moms for America and Texas Agriculture Commissioner Sid Miller have both voiced opposition against the EATS Act, a proposal that seeks to deal with California’s Proposition 12. Justice Neil Gorsuch, in a Supreme Court opinion last May, highlighted the triviality of regulating pork chops in comparison to weightier constitutional matters. USDA Secretary Vilsack acknowledged the complexity of the issue, likening it to the early challenges of governing under the Articles of Confederation. He suggested that chaos may prompt the adoption of national standards akin to the Constitutional Convention of 1787. However, he expressed doubts about the political will to address the issue at present.

Commissioner Miller, though personally against Prop 12, defends states’ rights to self-determination and opposes federal interference, such as the EATS Act — link to Miller’s article in The Hill. Moms for America (link), advocating for liberty and virtue, opposes the EATS Act, fearing it could undermine state agriculture laws. They pledge to mobilize grassroots efforts against any legislation nullifying state regulations. The Organization for Competitive Markets echoes these concerns, criticizing Vilsack for favoring multinational corporations over American family farmers and urging support for Prop 12 instead.

POLITICS & ELECTIONS

— President Biden’s re-election campaign boasts a substantial $130 million war chest, a sharp contrast to the Republican National Committee (RNC), which has limited funds, and Donald Trump’s team, which is grappling with substantial legal expenses. Despite concerns among Democrats regarding the president’s polling numbers, the Biden campaign recently disclosed raising $42 million in January alone. This announcement underscores Biden’s significant fundraising edge over Trump and the RNC, highlighting the financial strength of his re-election efforts.

KEY LINKS

Policy Updates