SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Currency cartel. Some of the world`s biggest banks are paying billions and pleading guilty to criminal charges that they manipulated the foreign exchange market.
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: All but ruled out.
Why many members of the Federal Reserve agree that a rate hike in June is highly unlikely.
HERERA: Risky business. Some regulators worry that investors don`t know the risks of certain ETFs and bond funds. Are they right to be concerned?
All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, May 20th.
MATHISEN: Good evening, everyone, and welcome.
Five banks, nearly $6 billion in fines, a handful of guilty pleas and something the attorney general of the United States calls, quote, “a breathtaking conspiracy”. Some of the world`s biggest financial institution, including JPMorgan (NYSE:JPM) Chase, Citigroup (NYSE:C), Barclays, the Royal Bank of Scotland, and UBS will pay billions for manipulating the currency and interest rate markets, one of the least regulated markets in the financial world and one of the largest, there, about $5 trillion changes hands every day.
The traders from different banks didn`t act as rivals in the foreign exchange market, but rather they worked together to rig the price of U.S.
dollars and euros in a scheme that went on nearly every day for five years through 2012.
Eamon Javers has more.
EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Deep inside of the posh offices of the world`s major banks, the language in the private digital messages of foreign exchange traders was right out of a mafia movie.
There was this message from one trader to another being invited to join the scam: “Mess this up and you sleep with one eye open tonight.” And this message to a trader in training, “If you ain`t cheating, you ain`t trying.” And then, this an admission of what the conspirators were really trying to do — “yes, the less competition, the better.”
Today, though, that language caught up with those traders as new U.S.
Attorney General Loretta Lynch announced the massive $5.6 billion settlement.
LORETTA LYNCH, ATTORNEY GENERAL: Currency traders at several multinational banks formed a group they dubbed “The Cartel”. It`s perhaps fitting that they chose that name as it aptly described the brazenly illegal behavior they engaged in on a nearly five-year basis. Almost every day for more than five years trade in this cartel used a private electronic chat room to manipulate the spot markets exchange between euros and dollars, using coded language to conceal their collusion.
JAVERS: On Wall Street, though, reaction to the settlement was muted.
UBS, Barclays and Royal Bank of Scotland shares were all up and Citigroup
(NYSE:C) and JPMorgan (NYSE:JPM) were slightly negative in the early part of the trading day. And for their part, the banks seemed poised to shrug off the settlements with analysts saying some of the penalties were lighter than expected. For example, in its press release today, JPMorgan
(NYSE:JPM) said, “The company is able to continue to serve its clients and does not anticipate future material constraints on its business activities.”
(on camera): No individual traders were charged today although Attorney General Loretta Lynch said the investigation remains open and ongoing. The big mystery here, though, is just how profitable this scam was for the big banks. The Department of Justice says it hasn`t calculated how much money the banks made from the underlying scam. So, that makes it difficult to access just how serious these penalties and fines were that were handed down today.
For NIGHTLY BUSINESS REPORT, I`m Eamon Javers in Washington.
HERERA: It is probably the clearest read yet from Federal Reserve about the near term outlook for rates. In the minutes from the Central Bank`s last meeting, most policymakers agree that raising rates in June would be too soon.
Hampton Pearson has the details.
(BEGIN VIDEO CLIP)
HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
In remarkably plane English, minutes from the April Fed meeting say most policymakers agreed June would be too early to start racing key short term interest rate which have been kept at historic lows since 2008.
The economies winter weakness was viewed as transitory and data on first quarter GDP is not yet final. Policymakers are also concerned about the lingering impact of the strong dollar on U.S. exports and the decline in business investments due to declining oil prices. More ammunition for economists and analysts is seeing the fed staying on the side lines until later in the year.
LINDSEY PIEGZA, STERNE AGEE: If anything, I think this is going to redirect the focus back to the weakness of the fundamentals in the U.S.
which has been ignored as of late, and I think this weakness further justifies the Fed to remain on hold until the earliest — the early — excuse me — of the latter part of 2015. But as we have long contended, holding the Fed on the sidelines until 2016.
PEARSON: The minutes also say Janet Yellen and her fellow monetary policy makers did discuss possibly sending a kind of early warning between meetings that the rate hike may be imminent. But that idea was opposed and the timing for the first rate hike will be assessed on a meeting by meeting basis.
Leading analysts say the markets are prepared.
JERRY CASTELLINI, CASTLEARK MANAGEMENT: And the markets, at least from an equity standpoint, have been discounting a much slower but more consistent move up in rates over the next six months. Now, whether the bond market preempts that because of a sustained movement in oil prices or whether they see it in inflation, it`s clear to us that there is some expectation for it.
PEARSON (on camera): By the time the Fed meets again in mid-June, it will have two more job reports and plus revised data on economic growth before deciding what`s next for interest rates.
For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson in Washington.
MATHISEN: That data dependent Federal Reserve is looking closely at weak first quarter economic growth. And today, we learned that the government agency charged with calculating the nation`s growth rate acknowledges problems with the numbers.
As Steve Liesman first reported, first quarter data has been meaningfully weaker than the other three quarters over the past 30 years.
And today, the Bureau of Economic Analysis said it`s aware of the issues and pledges a series of fixes over the next several months.
HERERA: Those minutes from the Federal Reserve weren`t enough to lift stocks which spent the day around the flat line. By the close the Dow Jones Industrial Average fell almost 27 points to finish at 18,285, the NASDAQ higher by almost two points, and S&P 500 down about two.
One of the worst performing sectors today, the airlines on investor concerns the major carriers would have to cut fares and add more routes to compete. Many of those stocks off as much as 10 percent.
MATHISEN: Dow component General Electric (NYSE:GE) gave new details on the sale of its financial unit, the conglomerate now has a faster timeline for the finance asset sale. This comes as it has more than doubled a target for benefits from its purchase of Alstom`s power business.
HERERA: And fellow Dow component Johnson & Johnson (NYSE:JNJ) is predicting big returns for one of the biggest businesses, pharmaceuticals.
The world`s largest maker of the health products outlined a strategy to revive growth and get pharma sales flying. But investors gave the plan kind of a cool reception, sending shares lower in trading today.
Meg Tirrell has more from J&J`s analysts meeting at its headquarters in New Brunswick (NYSE:BC), New Jersey.
MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Johnson & Johnson (NYSE:JNJ) is the world`s largest health care company, and pharmaceuticals is its largest business, bringing in more than $32 billion last year. That accounted for almost half of J&J total sales and the majority of the profit. Today, the company laid out its strategy for growth to an audience of about 100 analysts and investors in its home town of New Brunswick (NYSE:BC), New Jersey.
CEO Alex Gorsky in an exclusive interview explained what`s driving J&J`s biggest unit.
ALEX GORSKY, JOHNSON & JOHNSON CEO: If you go back since 2009, we`ve actually launched 14 compounds and now, if we look forward between now and 2019, yes, we expect to have 10 new compounds.
TIRRELL: That`s 10 new drugs J&J plans to submit for regulatory approval in the next four years, each it says with the potential to bring in more than a billion dollars in annual revenue.
GORSKY: Now, of course, you`re going to have some wins. You`re
going to have some that don`t turn out the way you expect. But overall, we`re very confident in the ability, particularly based on what we`ve been a do over the past several years, on our ability to really impact patients and drive this kind of innovation going forward.
TIRRELL: Growth is important as J&J`s pharma business faces significant challenges in the coming years. Its $2 billion hepatitis C drug Olysio is expected to be overtaken by newer competition, while up to a third of J&J`s pharmaceuticals business may become vulnerable to generic or biosimilar competition by 2019, including its giant arthritis drug Remicade.
MIKE WEINSTEIN, JPMORGAN: Remicade is J&J`s largest drug, largest product as a company, and will have its patent expire in late 2018 and the question right now for investors and for the company is will we see biosimilar competition prior to that?
TIRRELL (on camera): J&J details plan to bring to market new medicines for cancer, rheumatoid arthritis, depression, pain and insomnia and other maladies. And chief scientific officer, Dr. Paul Stoffels, outlined his views for what medicine will look like in the long-term, over the next few decades.
DR. PAUL STOFFELS, JOHNSON & JOHNSON CHIEF SCIENTIFIC OFFICER: I hope that every year, you will go to your physician and you will be screened for
30 to 50 cancers, you will be able to prevent a majority of the diseases which today are deadly, and we`ll deliver a lot of cures on many diseases, and we can prevent the infectious diseases by vaccines.
TIRRELL: First, though, the near term where J&J is aiming to reassure investors it`s got plans for growth.
For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell in New Brunswick (NYSE:BC), New Jersey.
MATHISEN: Still ahead, are bond mutual funds and certain ETFs a bigger risk than you think. What regulators are saying about these popular investments.
MATHISEN: Labor organizers and workers protested outside McDonald`s
(NYSE:MCD) headquarters. They`re demanding higher pay, $15 an hour.
McDonald`s (NYSE:MCD) recently said it would raise the starting minimum wage to at least $1 above the local minimum wage at company-owned stores.
The demonstration comes ahead of the company shareholder meeting scheduled for tomorrow.
HERERA: Those protests come one day after Los Angeles gave preliminary approval will increase its city wage. The city council voted to hike pay to $15 an hour by the year 20. The current minimum wage is $9 an hour. That measure would require business with more than 25 employees to comply, while smaller businesses have an additional year.
MATHISEN: And one company that recently increased pay for some of its workers is Target (NYSE:TGT). That company reported earnings and revenue that topped analysts` expectations, citing strong demand for products at the center of its new growth plan. The retailer also increased its full year earnings guidance. Investors sent shares slightly higher today. They close at $78.18.
Courtney Reagan has more.
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
One big box retailer hitting an earnings` bulls eye with its latest quarterly results. Target`s first quarter profit and revenue beating the street`s expectations with improved comparable sales and in-store traffic.
The company also increasing its full year earnings forecast and surprising investors by resuming its share buyback program after taking a six-quarter break.
CEO Brian Cornell launched a number of new strategies in early March that appear to be paying off, enhanced focus on what Target (NYSE:TGT) calls signature categories, like style, baby, kids and wellness. Sales in those areas increased by more than double the retailer`s average sales rate in the first quarter.
Another bonus to the bottom line came from Target`s lower shipping threshold from $50 to $25, implemented early in the quarter.
In an exclusive CNBC interview, CFO John Mulligan said it`s an investment that`s paying off.
JOHN MULLIGAN, TARGET CFO: We get a guest engaged digitally. We see sales increase in the store. So, we see sales overall for that guest increase three times, we see gross margin dollars increased by 2 1/2 times.
So, while there is some shipping cost associated with that, the net is we see incremental profitability.
REAGAN (on camera): While Target (NYSE:TGT) continues to incur expenses from the 2013 holiday season`s data breach totaling $166 million to date, customers have put it behind them.
(voice-over): The big box retailer counts April`s Lilly Pulitzer collaboration as a success but it wasn`t perfectly executed. The Web site couldn`t handle the traffic, leaving many shoppers frustrated with empty carts.
MULLIGAN: We`re disappointed in ourselves. Our expectation is that we provide a great guest experience regardless of where the guest interacts with us. We have our teams going back understanding what went wrong, testing into where we believe the issues were.
REAGAN: While these collections never moved the needle financially, Target (NYSE:TGT) says it generated more traditional and social media buzz than any other collaboration. Exactly what analysts say the retailer needs to put the Target (NYSE:TGT) back in its name.
For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.
HERERA: Teens are shopping at American Eagle Outfitters (NYSE:AEO) and that is where we begin tonight`s “Market Focus”.
The retailer saw its earnings soar on better-than-expected sales and stronger margins. The company is also forecasting current quarter profits to be above estimates, as fewer discounts helped its results. The shares were 5.5 percent higher to close at $16.61.
A different story for a very different retailer. Lowe`s missed estimates on both the top and bottom lines. The home improvement chain also saw same-store sales rise less than predicted. Shares tumbled more than 4 1/2 percent to $68.50.
Staples (NASDAQ:SPLS) saw its profit decline by almost 40 percent in the first quarter. This as sales fell and store traffic dwindled. The disappointing results only add to the company`s challenges. It is still waiting on regulatory approval for its takeover of Office Depot (NYSE:ODP).
Shares were 1.5 percent lower to close at $16.15.
And Hormel`s earnings came in higher than expected. Despite that, the nation`s second largest turkey processor is warning that the bird flu will negatively impact its Jennie-O turkey business. The firm expects sales in that unit to fall about 15 percent in the second half of the year. Still, shares popped four percent to $58.14.
MATHISEN: How about Pep Boys?
Pep Boys saw its shares surge today on reports of takeover talk. The auto-parts retail chain has been approached by Golden Gate Capital, and other interested parties, this according to Dow Jones. Pep Boys has a market cap of less than $500,000. Shares, though, were 16 percent higher today. They finished at $10.75.
Cable stocks like Cablevision and Time Warner (NYSE:TWX) Cable also jumping on M&A speculation. The French holding company Altice is buying U.S. cable group Suddenlink, spurring speculation that there could be more mergers in the cable biz. Altice is also reportedly interested in buying Time Warner (NYSE:TWX) Cable.
Cablevision surged 18 percent to $24.69. Time Warner (NYSE:TWX) Cable was more than 5 percent higher. It closed to $166.55.
After the bell Salesforce announced quarterlies that were slightly better than expected. The cloud computing company also hiked its full-year revenue guidance. Shares popped initially in after hours trading. During the regular session the stock was off almost 2 percent to $70.16.
William Sonoma`s results also topped the Street`s consensus in its late report today. The same-store sales came in strong as well. But its second quarter guidance was weak, which it blames on the West Coast port slowdown. Shares were up still in initial after-hours trading, as you see there. In the regular session, though, the stock was off slightly to $77.89.
HERERA: The Securities and Exchange Commission is proposing some new mutual fund reporting requirements. The agency voted to increase the amount of data collected from asset managers like Fidelity and Blackrock.
The move would force firms to disclose more detailed and frequent information about the assets in their funds, including potentially risky derivative products. The proposal would cover mutual funds and exchange traded funds known as ETFs.
MATHISEN: And a new report by the Financial Stability Oversight Council identifies certain ETFs and bond funds as being potentially risky during times of stress. The council created by the 2010 Dodd-Frank law looks for products and activities that could threaten or weaken the U.S.
Todd Rosenbluth, director of ETF research at S&P Capital IQ, joins us now.
Todd, what do you think? Are certain ETFs inherently more dangerous?
Could they pose in a time of stress a real risk to the financial system overall as the SFOC suggests?
TODD ROSENBLUTH, S&P CAPITAL IQ DIRECTOR ETF RESEARCH: So, there are certain ETFs that are definitely riskier than others, and they invest in less liquid securities, whether we talk about emerging market stocks or bonds, senior loans that are out there leverage ETFs. But more diversified plain vanilla ETFs that are tied to the S&P 500 index or that investing in investment grade bonds are not risky in our opinion and are not a threat to the overall market place.
HERERA: So, the retail investor who buys some of the more traditional ETFs does not need to worry about that particular risk, given the fact there is always risk in investing certainly, but as you mentioned, most ETFs do not pose a systemic risk.
ROSENBLUTH: Right. Like General Electric (NYSE:GE) or Johnson & Johnson (NYSE:JNJ) are quite strong. And so, are those bonds. And so, an ETF that holds those underlying securities is going to have strong liquidity. If you hold something that is less liquid, it doesn`t trade that often, then there is risk you might not be able to get out as quickly as you want to. The great thing about ETFs, is you can trade them intra- day. Hopefully, you can actually get out of them as you expect to.
MATHISEN: Let`s talk a little bit about mutual funds which also are put under the microscope here, too. And I assume that we`re talking about certain kind of bond mutual funds that invest in more or less liquid corners of the market.
ROSENBLUTH: Yes. And it is more common to see derivatives used in mutual funds than they are in ETFs so not holding stocks or bonds but ways to get exposure to that without paying as much, but having a little bit greater risk. If there is derivatives in the portfolio, that can amplify the risk that the fund is taking on if it`s not managed in the right way.
We also think that it`s great it is providing more transparency about the underlying assets and those underlying holdings. The more the investor knows about their ETF or mutual fund, the better equip they can handle the financial market.
HERERA: Right. Well, that was my question, is a lot of people moved into the bond funds partly because of the yield, partly because of the perceived safety. But how do you know if that fund is using derivatives to hedge their market positions?
ROSENBLUTH: So, the easiest way to do it is probably to go to their web site and look at the assets and when they talk about a breakdown, and if the total assets or percentages add up to more than 100 percent, it means they`re offsetting that with derivatives. If things add up to 100 percent using traditional bonds, it`s a good bet you are holding bonds that are relatively safe depending upon their credit quality or their interest rate risk or duration.
MATHISEN: What puzzles me here, Todd, is who is at risk if something went bad in one of these ETFs or one of these bond funds, who`s money is really at risk? And is there a transmission mechanism that would take a hiccup in one corner of the bond market and then make it present across the whole system, which is what the FSOC is supposed to be concerned about?
ROSENBLUTH: Right. I mean, if there is a systemic risk or there is a market failure or something like what we saw in 2008 when there was a flood of money out of any risky securities, then, of course, anything that is holding those securities is going to not only lose value but is going to be harder to exist those respective positions. If you`re diversified, if you`re holding traditional what I would call more plain vanilla ETFs, you`re going to offset that overlying risk. If you`re investing in less liquid markets like emerging markets or high-yield, then the risk is going to be greater.
MATHISEN: Got it. Todd, thank you very much. Todd Rosenbluth of the S&P Capital IQ.
ROSENBLUTH: Thank you.
HERERA: Coming up, a growing number of Americans are working for Chinese companies, just not in China.
HERERA: Here is what to watch f tomorrow. Goldman Sachs (NYSE:GS) and McDonald`s (NYSE:MCD) meet with their shareholders. Initial claims in existing home sales just some of the economic reports that will be released and we`ll get quarterly results from retails, including Best Buy (NYSE:BBY) and the Gap (NYSE:GPS). And that`s what`s on the agenda for Thursday.
MATHISEN: China will invest billions in the Internet infrastructure.
The company will spend $180 billion to increase Internet speeds by the end of 2017. The move is part of the government`s efforts to bolster its service industry in areas like ecommerce, green energy and bio engineering.
HERERA: China`s largest ecommerce company Alibaba was at the center of some big moves in shares of Yahoo (NASDAQ:YHOO). Yahoo (NASDAQ:YHOO) stocks rebounded today after selling off yesterday when it said the IRS will not tax the spinoff of its stake in Alibaba. An IRS official late Tuesday said that the agency may change the way it handles spinoff which currently are tax-free. Yahoo (NASDAQ:YHOO) made it clear that any rule change would not impact its Alibaba spinoff, and stock the finished the day
4 percent higher.
MATHISEN: China is investing a lot of money outside its borders.
Here in U.S., investment is growing by leaps and bounds as it turns out, according to a new report. More Americans are working for Chinese companies than ever before, right here in the United States.
Michelle Caruso-Cabrera has the details.
MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT:
Roughly 80,000 Americans are on the payrolls of Chinese-owned companies located here in the U.S. and just five years ago, that number was less than 15,000. In 2000, it was almost zero. Those numbers are still small relative to Chinese size, consider that 700,000 Americans work for Japanese companies.
Still, the authors of the new report about Chinese investment in the U.S. say between 200,000 and 400,000 jobs will be linked to Chinese companies in the U.S. by 2020. That`s because Chinese investment in the U.S. is up sharply and rising. Roughly $47 billion has been poured into the U.S. by the Chinese since 2000. Ninety percent of that is in the last five years.
The states receiving the most money: California, Texas and North Carolina — all more than $5.5 billion — followed by Illinois and New York.
Many of those investments are in real estate or oil production, and headquarters for Chinese tech companies like Alibaba.
When it comes to the largest number of employees, North Carolina is the winner because it is the U.S. headquarters of Lenovo. The Chinese computer company that bought IBM`s PC business a little more than 10 years ago, and employs 8,000 people.
Additionally, Smithfield Foods (NYSE:SFD) bought by a Chinese meat processer a couple of years ago has several facilities there, employing
In Illinois and Michigan, those are mostly manufacturing jobs.
Americans are still little uncomfortable, perhaps even suspicious of Chinese companies. Several high-profile purchases by Chinese companies have been vetoed by the U.S. government due to security concerns. For example, Cnooc, the Chinese government-owned oil company, was forced to drop its $18 billion bid for Unocal back in 2005 due to strong resistance in Washington.
Just yesterday, the U.S. announced it had discovered a Chinese espionage ring in the U.S., and arrested a Chinese professor who is allegedly part of that spy ring, stealing trade secrets from two U.S.
Steve Orlins, the president of the national committee on U.S.-Chinese relations, which commissioned the report, says there are bad apples in every bushel.
STEPHEN ORLINS, NATIONAL CMTE. ON U.S.-CHINA RELATIONS PRES.: There are Chinese who will come to steal. There are others who will come to steal. I think we do not see that these people who are investing are coming to steal American technology. We don`t see them closing plants in the United States and relocating them back to China.
But are they trying to develop product in the United States that goes global? Absolutely. Are they investing in R&D in the United States?
I think it`s a very positive story as opposed to a lot of the negative stories that we hear about China.
CARUSO-CABRERA: Whether positive or negative, this study says Chinese investment in the U.S. is going to continue to grow and grow dramatically.
For NIGHTLY BUSINESS REPORT, Michelle Caruso Cabrera.
HERERA: It`s so nice to have you back.
MATHISEN: Good to be here. Thank you very much.
HERERA: All right. That will do it for NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera. Thanks for joining us.
MATHISEN: And I`m happy to be back. I`m Tyler Mathisen. I`m just happy to be. Have a great night, everybody. We`ll see you tomorrow.
Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2015 CNBC, Inc.