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Analysis-Fading Risks, Fear Of Missing Out May Fuel US Stocks After Near 20% Rally

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Worries that have dogged U.S. stocks for months are fading, pushing some Wall Street firms to raise their outlooks for equities and beckoning investors who have remained on the sidelines. Signs of strength in the economy, relief over a deal to raise the U.S. debt ceiling and an interest rate hiking cycle that may be nearing its end have heartened investors and driven the benchmark S&P 500 up nearly 20% from its October low – one definition of a bull market. Further gains may hinge on whether investors who cut stock allocations to the bone over the last year return to the market. Cash on the sidelines is plentiful: U.S. money market fund assets hit a new record of $5.8 trillion last month, while cash levels among global fund managers remain high relative to history, according to the latest survey from Buffa Global Research. And while computer-driven strategies have been piling into the market for months, according to Deutsche Bank (ETR: DBKGn), positioning among discretionary investors — a cohort that includes everyone from active mutual funds to retail investors — is lighter than it has been 74% of the time since 2010, the bank’s data showed. “There certainly seems to be a bit of a more optimistic ring to the market,” said Chuck Carlson, chief executive officer at Horizon Investment Services. “Further strength might beget further strength because of the FOMO factor,” he added, using the popular acronym for “fear of missing out.” DISSIPATING RISKS A stronger-than-expected U.S. economy is one reason for investor optimism, after many spent months girding for a widely expected recession. Data on Friday showed U.S. job growth accelerated in May, even as the unemployment rate rose to a seven-month high – bolstering the case for those betting the Fed can contain inflation without badly damaging growth. “Inflation has clearly subsided, and yet labor market strength has remained intact,” wrote BMO Capital Markets chief investment strategist Brian Belski in a recent note. While a severe recession was his biggest worry at the start of the year, now “the anticipated recipe for disaster is simply not present.” BMO raised its year-end S&P 500 price target to 4,550 from 4,300. The index, which is up 11% year-to-date, closed at 4,267.52 on Wednesday. It is up 19.3% since Oct 12. Other firms that have issued rosy targets in recent days include Evercore ISI, which now sees the S&P 500 at 4,450 at year end, up from its prior view of 4,150, and Stifel, which anticipates the index will reach 4,400 by the third quarter. BofA late last month raised its year-end target for the index to 4,300 from 4,000. Another key risk dissipated last week when Congress passed a bill to suspend the debt ceiling, averting a potentially catastrophic U.S. default. “Moving past the debt ceiling and at least having some economic data that looks ok is actually enough to get some people interested,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. Lerner on Monday shifted his expected S&P 500 range for this year up to 3,800-4,500, from 3,400-4,300 previously, citing improving earnings trends among other factors. At the same time, investors have been cheered by signals that the Fed is unlikely to deliver many more of the rate increases that shook markets over the last year. Bets in futures markets showed investors projecting the Fed would leave rates unchanged at its June 13-14 monetary policy meeting and raise them only once more this year Of course, plenty of skeptics remain. John Lynch, chief investment officer for Comerica (NYSE:CMA) Wealth Management, said the S&P 500 could retest its October lows with “elevated interest rates and tighter credit standards weighing on economic activity for the remainder of the year.” Another worrisome signal is the fact that the S&P 500’s gain this year has been spurred by just a handful of megacap stocks like Microsoft (NASDAQ:MSFT) and Nvidia (NASDAQ:NVDA), which have been fueled in part by excitement over advances in artificial intelligence, while large areas of the market have languished. For Hans Olsen, chief investment officer at Fiduciary Trust Co, that’s an ominous sign. Olsen believes signals such as the inverted yield curve show recession risks remain “pretty high” and his firm is maintaining higher than typical cash levels. “We have one powerful rally inside a bear market that has yet to be fully resolved,” he said.

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China’s JD.com To Open Grocery Stores By Merging 7Fresh, Other Units

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Chinese e-commerce giant JD (NASDAQ: JD).com plans to open retail grocery stores through the merger of its 7Fresh supermarket unit with other business lines such as its group-buying arm Pippin, a company spokesperson said on Monday. Beyond opening actual stores, the new division will explore innovative retail models, the spokesperson told Reuters, confirming reports in local media. Yan Xiaoping, who was previously responsible for the online e-commerce platform’s international division, will take charge of the business and report to Xu Ran, CEO of JD.com, the spokesperson added. This latest development comes after JD.com laid out an ambitious 20-year blueprint earlier this month to build seven enterprises that will be valued at more than 100 billion yuan ($13.83 billion) each.
The company faces an increasingly competitive landscape, with Chinese consumers able to choose from a growing range of platforms including JD’s main rival Alibaba (NYSE: BABA) Group, PDD Holdings’ Pinduoduo (NASDAQ: PDD) and Byte Dance’s Doujin, the Chinese equivalent of Tikor. JD.com created 7Fresh in 2017 after Alibaba introduced Freshippo, a premium physical grocery store. Alibaba said last month that it plans to kick off an IPO process for Freshippo soon as part of the company’s restructuring. In 2017, JD spun off its logistics unit into a standalone unit. It also plans to spin off its property and industrial units and list them on the Hong Kong stock exchange in deals worth $1 billion each, Reuters reported in March.

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Explainer-What is Hong Kong’s New Dual HKD/RMB Share Counter?

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The Hong Kong stock exchange will start offering yuan-denominated Chinese stocks from Monday in what it calls a dual counter, a scheme that is seen as part of China’s efforts to increase the yuan’s use overseas. The exchange will initially target the offerings at investors holding offshore yuan. Ultimately, the Hong Kong Exchanges & Clearing (HKEX) aims to enable mainland investors to trade yuan stocks listed in Hong Kong using their onshore yuan. Here’s a look at how the yuan-denominated stock trading works, and the CNH’s role. HOW DOES THE DUAL STOCKS COUNTER WORK? The HKEX’s Dual Counter Model allows investors in Hong Kong to trade stocks concurrently in both Hong Kong dollar and the yuan. A total of 24 companies will start offering yuan counters at the scheme’s launch. The HKEX has said all shares of the same securities in the two trading counters will be fully interchangeable between counters. They will be designated as the HKD-RMB Dual Counter Securities. The yuan counter will be listed separately under a different, 5-digit stock code that begins with “8”; while the Hong Kong dollar counter will follow a 5-digit number starting with a “0” The HKEX is also rolling out a market-maker program so that any price differences between the two counters because of the yuan’s moves can be reduced. IS IT THE FIRST TIME THAT YUAN-DENOMINATED STOCKS WILL BE TRADED ON THE HKEX? No. There was a dual-currency trading precedent, when Hopewell Highway Infrastructure offered such an option of yuan shares in 2012 to investors, long after its Hong Kong shares first debuted in 2003. But the yuan counter failed to gain traction due to the significant price gap between the two trading counters. WHICH INVESTORS WILL TRADE ON THE DUAL COUNTER? The first batch of investors could be holders of offshore yuan deposits in Hong Kong, which totaled 833 billion yuan ($117 billion) at the end of April, as they look for potentially higher returns in the stock market. Yuan holders in China’s trading partner countries, such as Russia, Pakistan and the Middle East, could also be potential investors. The HKEX is working with Chinese regulators to allow mainland investors to eventually participate via the Stock Connect investment channel that connects the Hong Kong, Shanghai, and Shenzhen stock exchanges. Mainland investors currently trading Hong Kong stocks through the southbound leg of the Stock Connect face an exchange rate risk, to hedge which they have to pay a 2% margin to their brokers when they submit their trade orders. Also, investors are told the exact yuan amount they have to pay or receive only at the end of each trade day. The yuan counter will mean investors will be paying the yuan price for stocks quoted in real time during trading hours. TELL ME MORE ABOUT THE OFFSHORE YUAN, OR CNH
CNH stands for offshore yuan, launched in 2003 as an experiment in creating a distinct, offshore market for yuan.
The onshore yuan is only partially convertible as China’s capital account remains largely closed. Schemes such as the Stock Connect and CNH are part of China’s efforts to gradually open up its capital market to foreigners.
The onshore yuan is largely fungible with CNH and, under normal market conditions, their exchange rates tend to move together. The onshore yuan is more managed by authorities, with the spot rate allowed to trade within a 2% range around the official daily fixing set by China’s central bank. The CNH is driven mainly by demand and supply.

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Goldman’s Cost-Cutting Accelerates As Lean Times Persist

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Goldman Sachs Group Inc (NYSE:GS)’s managing directors were invited to meetings this month to receive an ominous message: take even more painful steps to cut costs, according to four sources familiar with the situation. Belt-tightening on the agenda for meetings of Goldman’s top executives is another sign that the firm’s ongoing push to cut $1 billion in costs is now accelerating as managers target smaller and smaller line items and contemplate more job cuts, sources said. Previously, employees were able to spend on subscriptions for websites that provide data and information. They could book a business trip to see one client and expense pricey meals. Now senior managers are needed to sign off on expenditures and travel requires seeing multiple clients, the sources said. If revenues don’t bounce back alongside the aggressive cost-cutting measures, more employees can expect to be laid off this year, one of the sources said. The bank has let go of 3,700 employees since September. Managing directors will also be given goals for budget reductions and be held responsible for delivering them, one of the sources said. “We have repeatedly emphasized our focus on expense management in this environment, and are delivering on the $1 billion plan we laid out at investor day to drive efficiencies and deliver for shareholders,” a Goldman Sachs spokesperson said in a statement. The latest round of penny-pinching comes as Goldman Sachs management grew more pessimistic about an economic recovery and dollmaking this year. Investment banking revenue for the industry is so far down nearly 46% in the second quarter from same quarter a year earlier, preliminary data from Dialogic shows for the period April 1 to June 6. Goldman Sachs investment banking revenue is down 52% in that same period, the Dealogic data showed. Goldman declined to comment on the data. Goldman’s trading revenue, which recorded its second-best year in 2022 at $25.67 billion due to market volatility, is also shrinking. But it is the firm’s ill-fated foray into retail banking that has captivated the industry because it is a rare, and public, flop for the bank. When Silicon Valley and Signature banks failed in March, Goldman staff joked that the turmoil was a blessing in disguise for CEO David Solomon because it drew attention away from the company’s travails, three sources familiar with the situation said. Now, the bank is preparing to lay off just under 250 people, including partners and managing directors in its most senior ranks. The cuts have already begun, two sources familiar with the matter told Reuters. Since the dismissals affect fewer than 250 employees globally, Goldman Sachs does not have to issue an advance notice to employees of layoff plans under U.S. law, one of the sources said. Goldman Sachs said in February it aims to reduce payroll expenses by $600 million, a figure that President John Waldron said earlier in June it could exceed by the end of the year. Goldman is not alone in curbing costs. Morgan Stanley (NYSE:MS) is cutting 3,000 staff this quarter, Lazard (NYSE:LAZ) Ltd plans to reduce 10% of its workforce and Citigroup Inc (NYSE:C) also intends to pare down. But Goldman’s January layoffs were its biggest since 2008, and it is seen as a bellwether for Wall Street’s fortunes because it often occupies top rankings in banking and trading. The bank’s financial woes have put a dent in its valuation. Goldman Sachs trades at 0.97 times its book value, lagging rivals Morgan Stanley and JPMorgan Chase & Co (NYSE:JPM) which trade at 1.45 times and 1.33 times, respectively, according to Refintiv data. Investors are assessing whether Goldman’s strategy — to expand asset management alongside its traditional mainstay of trading — will bear fruit. “Goldman does have a very cyclical business,” said UBS analyst Brennan Hawken. “There’s no denying the headwinds they’re facing. It’s a clear realization that this is not temporary.” The headcount reductions and cost cutting do not solve Goldman’s fundamental challenges: its reliance on investment banking and trading. That compares with Morgan Stanley, where profits from wealth management have provided a cushion against weakness in dollmaking. “It feels pretty difficult out there right now, and challenging,” Waldron told investors at a conference on June 1. “We’re more cautious. We’re running the firm tighter.”

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