BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Surprise move. China devalues its currency causing concerns in markets around the globe that the world’s second largest economy is in worse shape than many think.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Old crime, new twist. The world of hacking is entering a new front and it exposes a vulnerability within the financial world.
GRIFFETH: Little known benefit. Why thousands of young children qualify to collect their own Social Security checks.
All that and more tonight on NIGHTLY BUSINESS REPORT for this Tuesday, August the 11th.
And good evening, everybody. I’m Bill Griffeth, in tonight for Tyler Mathisen.
HERERA: I’m Sue Herera. Good to have you along for the ride tonight.
GRIFFETH: Thank you as always.
HERERA: Well, if China was looking to jolt the global markets, it certainly succeeded. In a surprise move, the world’s second largest economy devalued its currency by nearly 2 percent against the U.S. dollar. Its largest devalue situation in 20 years.
A weaker yuan would make China’s goods more affordable to foreign buyers. So, the move is being widely interpreted as an indication China’s economy is in jeopardy of a deeper slow down. Those concerns sent stocks tumbling. The Dow Jones Industrial Average fell to 17,402. The NASDAQ dropped 65 and the S&P 500 sank 20.
Commodities also came under pressure since China is a big buyer of them. Oil fell to a six-year low, down 4 percent to $43.08. Crude was also pressured by a report from OPEC that showed output increased to a three-year high in July.
And it’s not just stocks and commodities that are reeling. The impact could be wide reaching.
HERERA: It was a shot literally heard around the world. On a down day, China’s devaluation of the yuan is an anchor that dragged down stocks, bond yields, and commodities markets around the world.
BORIS SCHLOSSBERG, BK ASSET MANAGEMENT: I think screaming that China is in trouble, we’ve seen a series of data points out of China of a serious slow down.
HERERA: Factory output is weak, low inflation is making it harder for Chinese companies to pay off debt and the government has been cutting interest rates while trying to fend off a stock market collapse.
Now, devaluing the currency means Chinese exports are cheaper to buy but the reverse is also true. Goods imported into China, especially commodities like oils and metals are more expensive. Companies sure to be impacted include Yum Brands (NYSE:YUM), which owns Kentucky Fried Chicken, Johnson & Johnson (NYSE:JNJ) and Apple (NASDAQ:AAPL), all rely heavily on sales in China.
But a weaker yuan means less revenue when their sales are converted back into U.S. dollars. Apple (NASDAQ:AAPL) saw shares in Greater China, including Hong Kong and Taiwan surged 112 percent in its most recent quarter.
Overall, it does 27 percent of its business there. The lower yuan caused Jeffreys to lower the target on Apple (NASDAQ:AAPL) today to $130 per share.
Seventeen of the top 20 S&P 500 companies with the highest sales exposure in China are tech. The biggest are Intel (NASDAQ:INTC), which does 36 percent of its sales there. Qualcomm (NASDAQ:QCOM), which does more than 60 percent, and Texas Instruments (NYSE:TXN) with 44 percent.
Overall, though, the S&P 500 has only 2 percent of its sales at risk in China, which leads to an interesting debate. Just how much the lowered yuan will influence the U.S. Federal Reserve? Some believe it will be a big factor.
SCHLOSSBERG: I think they are going to hold. I think this make it is much more likely that they are going to hold.
HERERA: Others, not so much.
DAVID KELLY, JPMORGAN FUNDS: I don’t think the Federal Reserve will back away just because of this one event. All of this, lots else could happen between now and the middle of September.
JIM MCCAUGHAN, PRINCIPAL GLOBAL INVESTORS: I don’t think it really changes the equation. The Fed will be making monetary policy on the basis of U.S. conditions and because of U.S. policy needs.
HERERA: So, the real question may be just how much devalued yuan will affect the U.S. economy.
HERERA: And today, the U.S. Treasury said it is too early to judge the implications of China’s currency devaluation, but the department will continue to press China to move towards a market-oriented exchange rate and that any reversal from that would be troubling.
GRIFFETH: Well, let’s put it in perspective.
Joining us to do that and tell us what it means for the U.S. economy, the equity markets and the Fed, Josh Feinman, chief global economist at Deutsche Asset and Wealth Management, and Paul Christopher is the head of global market strategy at Wells Fargo (NYSE:WFC) Investment Institute.
Welcome to you both. Thanks for joining us tonight.
JOSHUA FEINMAN, DEUTSCHE ASSET AND WEALTH MANAGEMENT: Good to be here.
PAUL CHRISTOPHER, WELLS FARGO INVESTMENT INSTITUTE: Thank you.
GRIFFETH: So, Josh, what do you think? There’s an air of desperation to this when you put into context of all that they have done to try and shore up their stock market. Now, they are trying to devalue the currency to spur growth. Do you think it will work? And what is next, do you think?
FEINMAN: I think that’s the worry, that people are just concerned that China is slowing more than the official data kind of suggested and this move kind of fuels that a little bit. That’s the glass half empty.
On the plus side, though, you know, it’s a modest move. It’s not likely to move the needle dramatically on China’s competitiveness. And keep in mind, one of the factors driving in this, they are trying to move to a more market-oriented flexible exchange rate so that they can move their currency to a global reserve currency status. So, I think this does help a little bit in that regard.
HERERA: And, Paul, you think this is part of a longer term strategy by China to remain competitive and also to move towards a reserve currency status?
CHRISTOPHER: That’s right. The Chinese have a history of making important new reforms during periods when a particular sector is under a crisis. They did so at the banks a year or two ago when they lifted the deposit ceilings and the floors on lending. So, this is the sort of thing that the Chinese authorities like to do in order to get more competitiveness and, frankly speaking, to show that the market that the yuan can move down as well as up. It is an important step in that direction.
GRIFFETH: Paul, the asset — the equity markets around the world sold off on this news. If they continue this devalue situation of their currency, could you see more downside for U.S. equities especially?
CHRISTOPHER: I think the real risk here is that somehow China triggers a round of competitive or retaliatory devaluations and depreciations in emerging market currencies, which have already been week. That sort of a retaliatory or competitive devaluation would end up putting pressure on the domestic economies in emerging markets.
They are already under some pressure. That could come home to produce slower global growth and hurt U.S. firms in that way. But I think that’s a bit of a stretch and a low probability. China really has no interest in engaging in that sort of competitive devaluation. In the first place, China is more competitive now that it was before. And it’s moving up the value chain. And, secondly, China wants to demonstrate to the International Monetary Funds and others that the currency is capable of being stable and, therefore, a good candidate to be a global reserve currency.
So, no, I think this is a not desperation move by China.
HERERA: So, Josh, weigh in on what this means for the U.S. Fed. Many people are expecting a rate hike in September from the Fed. Others think that the implication of this, of China slowing down perhaps in some people’s opinion with this devaluation puts the Fed on hold.
What, if anything, do you think it does if anything for the Fed?
FEINMAN: Yes, I don’t think this event by itself really is going to dictate one way or the other. I do think the Fed is likely to raise rates before the end of the year. Whether it’s September or whether it’s Q4 is a close call. I lean towards September, but that’s going to be dictated by the domestic data and sort of the Fed’s judgment between now and then.
I don’t think that China has moved by itself is going to be the arbiter. Keep in mind, U.S. exports to China are 1 percent of U.S. GDP. You know, it’s not likely to move the needle too much.
GRIFFETH: Josh, there’ll be people watching tonight wanting to know about their investments here in the U.S., if they are investing in China in one way or another, especially those multinationals who might derive a lot of revenue. Apple (NASDAQ:AAPL), I can think of, or other companies like that. Does this give you pause or do you buy bargains at this point, do you think?
FEINMAN: You know, I think you’ve got to look at it on a company by company basis. But overall, there are some companies that are more exposed, to be sure. But I think the overall impact of the U.S. economy and U.S. markets, once the dust settles on this, is not likely to be too much. I agree that, you know, we’re not likely to see this, you know, round of competitive devaluation or the real currency or trade wars, something that could upset markets more.
I think we’re going to fall way shy of that. I think Chinese authorities are going to tread pretty carefully here. So, I think in the coming days, things will sort of settle down, we’ll focus back on the U.S. domestic fundamentals, which are not great, but they are improving.
HERERA: And, Paul, why don’t you take the final word here. Do you think that this should or will change the Fed’s perspective on their ability to raise rates before the end of the year?
CHRISTOPHER: Only if we were to see that unlikely case of a competitive devaluation or some other disruption that arises as a result of countries trying to outcompete China. I don’t think that’s very likely, as Josh said. I think we’re going to see the Fed focus mainly on the U.S. story as long as the global story remains orderly.
GRIFFETH: Josh Feinman and Paul Christopher, good to see you both. Thanks for joining us tonight.
FEINMAN: Thanks for being here.
CHRISTOPHER: Thank you.
GRIFFETH: Well, the move by China to devalue its currency could possibly hurt Chinese consumption of luxury cars. Later in the program, we will take you to a plant in the U.S. that’s now making and exporting cars to that country.
HERERA: And now to another global hotspot, Greece. That country and its international creditors have agreed on the terms of a third bailout. The plan would provide the equivalent of $94 billion in aid in exchange for economic austerity. But questions remain about whether the deal will be ratified by other European governments in time to send the aid to Greece.
GRIFFETH: And now to the U.S. economy where employees are working more efficiently, according to the Labor Department this morning. Productivity growth increased to an annual rate of 1.3 percent in the second quarter. Separately, wholesale inventories rose more than expected in June — in fact, by the largest amount in more than a year. Rising inventory levels do suggest that businesses are more confident that consumer spending will increase.
HERERA: It’s an old-fashion crime with a new twist. Regulators and prosecutors today charged a local group of traders and hackers in an insider trading scheme that allegedly netted the wrongdoers millions of dollars in illicit profits.
Mary Thompson has the story.
MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: There is a new front in the world of cybercrime — insider trading.
MARY JO WHITE, SEC CHAIR: Today’s international case is unprecedented in terms of the scope of the hacking at issue, the number of traders involved, the number of securities unlawfully traded and the amount of the profits generated.
THOMPSON: At a press conference, SEC chair Mary Jo White detailing the workings of what she called a groundbreaking case involving the global group of 17 hackers and traders and 15 firms and funds. The SEC alleging that they netted $100 million in illegal profits.
WHITE: All companies should be vigilant. All of us should be vigilant in protecting our systems, taking measures to detect and guard against hacking.
THOMPSON: The masterminds of this scheme, two Ukrainian hackers the SEC alleges access company press releases before they were made public. The hackers infiltrating three wire services through malware and employee logins and then sharing the information with the traders who bought or sold company stocks or options before the release went public, closing out their position soon after.
The case highlighting the vulnerability of our interconnected financial system and while banks spent billions on building their cybersecurity system, cyber specialist Shawn Henry says criminals are looking for the soft spots of those defenses.
SHAWN HENRY, CYBER SPECIALIST: They are always going to look for the weakest links, the adversaries, and in this case, they targeted the news wires.
THOMPSON: Over a five-year period, regulators and prosecutors say the group traded on 800 different releases, most involving earnings reports of companies, including Panera Bread (NASDAQ:PNRA), Caterpillar (NYSE:CAT) and Edwards Life Sciences.
And while the wire services kicked the hackers out several times, they came back, showing when it comes to cyber crime, persistence and patience can pay off for a while.
For NIGHTLY BUSINESS REPORT, I’m Mary Thompson.
GRIFFETH: And still ahead, the little known Social Security benefit for children.
HERERA: Shares of Google (NASDAQ:GOOG) rose 4 percent today following the company’s major restructuring effort that we told you about last night. The overhaul creates a holding company called Alphabet and its new Google (NASDAQ:GOOG) subsidiary will include search, is operating systems and its high-growth YouTube business, which Julia Boorstin points out, could now be more important than ever.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: This move shines a spotlight on YouTube, an increasingly important part of Google’s core business. Though YouTube tells me the division’s revenue will not be broken out, investors are applauding this new structure on confident it will provide better insight into the growth and profitability of YouTube and the other ad businesses under Google’s umbrella.
ROGER MCNAMEE, ELEVATION PARTNERS: In the long run, as the advertising-based Internet businesses, so which is to say surge and YouTube and all begin to slow down, they’re going to have different investment characteristics than the rest of Google (NASDAQ:GOOG).
BOORSTIN: YouTube is accredited this past quarter for being a huge driver of the company’s upside surprise. She didn’t reveal financials but she says that YouTube’s watch time has accelerated to its fastest rate in two years, of 60 percent year over year.
While YouTube’s top 100 advertisers are spending 60 percent more than they did last year.
MCNAMEE: They’ve created a business model there that I think, if you will, has some moral questions to it because they are taking a huge piece of the pie, you know, for content created and owned by others. It is nonetheless a spectacular business.
UNIDENTIFIED MALE: It’s great to hang out would you today.
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Looking forward to it.
BOORSTIN: Analysts are bullish that the new management focus will be beneficial and they are hoping to get a better sense of YouTube’s margins and how well YouTube is fairing against Facebook (NASDAQ:FB) as it invests more in its video ad platform.
It’s worth noting that YouTube operates under the umbrella of Google (NASDAQ:GOOG) is sort of serving as a little bit of a model for what we’re seeing now with alphabet and its operating companies. It speaks to the success that YouTube has had with its operating independence.
For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin, in Los Angeles.
GRIFFETH: American Airlines reports an increase in traffic and that’s where we begin tonight’s “Market Focus”.
The carrier saw demand rise in July as more passengers flew American and there were fewer empty seats per flight. Shares were 2.5 percent higher on an otherwise down day of $42.70.
Meanwhile, a Japanese life insurance company will be buying the U.S. insurer Symetra Financial (NYSE:SYA) in a deal worth nearly $4 billion. The deal comes as Japanese insurers have been looking overseas for acquisition opportunities because of a declining aging population in Japan. Shares were almost 7 percent higher to $31.50 on Symetra.
And the cyber security software maker Symantec (NASDAQ:SYMC) is selling its data storage business called Veritas to Carlyle Group. Symantec (NASDAQ:SYMC) will use some of the proceeds from the $8 billion deal to increase its stock buyback program. The firm also announced quarterlies that missed estimates. The stock tumbled on that news, down nearly 7 percent to $21.34.
And on Friday, we told you about reports that the credit card lender Capital One Financial (NYSE:COF) was in talks to buy General Electric’s health care finance unit. Well, today, that deal is official. The price tag on the acquisition is $9 billion. Shares of G.E. fell 2 percent to $25.71. Capital One was off almost 2 percent as well to close to $80.87.
HERERA: Red Robin disappointed investors as earnings were in-line with estimates, but sales missed forecasts. The company also gave a pretty dismal outlook, saying it expects revenue growth for the year to be at the low end of its estimates. Shares slid more than 9 percent to $80.15.
Towers Watson (NYSE:TW) managed to post a beat on both the top and bottom lines. This is the consulting company that agreed to merge with Willis Group in late June. Despite the beat, though, the stock was off a fraction on this down day to $125.13.
Zebra Technologies (NASDAQ:ZBRA) reported earnings and guidance that missed estimates. The printing technologies company did see sales rise as it benefited from the acquisition of Motorola’s scanner business. Still, shares slid about 24 percent to $83.80.
And Fogo De Chao, I love saying that name, posted an earnings beat in its first release since going public in June. The Brazilian steakhouse also reported restaurant sales growth. But revenue and earnings fell from a year earlier. Shares were volatile in initial after-hours trading. By the close, the stock was up more than 2 percent to $20.
GRIFFETH: I’m glad you had to say that.
As Social Security turns 80, its reach has grown. Now, last year, over 59 million Americans received more than $850 billion in Social Security benefits. And some 300,000 minors and children were also receiving benefits from a little known portion of the program.
Hampton Pearson tells us about it tonight.
FRANKLIN ROOSEVELT, FORMER PRESIDENT: A hope of many years’ standing is in large part fulfilled.
HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Social Security today has grown and expanded in ways that Franklin Roosevelt could never have imagined when he signed the legislation into law 80 years ago this week.
In recent years, the financial crisis forced baby boomers nearing retirement age to look for new ways to maximize their Social Security benefits. One of the more creative solutions from financial planners, a little known loophole sometimes known as the Viagra college fund.
People who have reached the magic age of 66 can file for benefits triggering a 50 percent monthly payment to any minor dependent children until the child reaches age 18.
For example, when dad turns 66, he’s entitled to, let’s say, a $2,000 a month benefit. His child gets $1,000 a month until age 18. Put that in a 529 college savings plan and even a Harvard education becomes affordable.
MARC GOLDWEIN: This defendant benefit doesn’t care how rich you are. It doesn’t care how much you need the benefit.
PEARSON: Right now, Social Security estimates there are more than 300,000 children of retirees receiving benefits and the number could go higher. But small change at Social Security had been a challenge for reformers because the savings are minimal.
GOLDWEIN: Social Security is usually kind of treated as sacrosanct, and we only reform it when we’re really going to reform it. We need to do that soon. We need a big package and that might be an opportunity for some of the small reforms. But I don’t see a chance of that going on their own.
PEARSON: Bernie Sanders favors lifting the income cap on the payroll tax.
SEN. BERNIE SANDERS (D-VT), PRESIDENTIAL CANDIDATE: A Wall Street CEO who makes $20 million a year pays the same amount into Social Security, as someone who makes $118,500.
PEARSON: There is a challenge to the FDR legacy on the horizon. Social Security trustees say the disability fund, part of the massive program, could run dry by the end of 2016.
For NIGHTLY BUSINESS REPORT, I’m Hampton Pearson in Washington.
GRIFFETH: Well, to read more about this Social Security benefit, you can head to our Website. We have it there at NBR.com.
HERERA: Coming up, a car that’s made in America heading for China and creating jobs in the heartland in the process.
GRIFFETH: Here’s what to watch tomorrow. Dow component Cisco (NASDAQ:CSCO) Systems reports its earnings. The Labor Department releases its job openings and labor turnover survey for the month of June, and Federal Reserve Bank of New York president Bill Dudley scheduled to speak tomorrow. That’s coming up. What to watch for on Wednesday.
HERERA: The number of complaints that passengers filed against airline carriers rose by 20 percent this year. That’s according to a Department of Transportation report. The two most popular complaints were flight disruptions and baggage problems. The government agency also ranked the best and worst offenders in terms of arriving on time in June. Hawaiian (NASDAQ:HA) ranked best, Alaska came in second, Delta was third. The worst airlines, Spirit, United and Frontier.
GRIFFETH: Auto sales in China, the world’s largest auto market right now, hit their lowest levels in almost a year and a half. The China Association of the Automobile Manufacturers said that retail sales of passenger vehicles dropped about 6.5 percent last month. It was the third time in four months that auto sales had declined in that market.
HERERA: And China’s move today to devalue its currency by nearly 2 percent could potentially cut into Chinese consumption of luxury cars. But that’s not stopping a Midwest assembly line from operating in overdrive. In fact, one automaker is turning to an old Hummer plant to help it with production.
Phil LeBeau has the story tonight from Mishawaka, Indiana.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: It’s a sign of how far the auto industry has come in America. The Mercedes-Benz R-class, which is only sold in China, now rolls off an assembly line just outside South Bend, Indiana, in a plant that once cranked out the hummer.
HOWARD GLASER, AM GENERAL: We’re not just focused on the past, the Hummer and H2. We’re looking to the future. We’re at the front windshield, not the rear-view drive, and we think it’s going to be great ride.
LEBEAU: The R-class is now built here because the Mercedes plant in Alabama, which has long been a hub for SUV production, is running out of capacity. And with the demand running high, thanks to low gas prices, Mercedes turned the to the old Hummer plant for help. Welcome news for several hundred hired to work the line.
LAMAR ASHFORD: We’re ready to get back into the plant. I mean, we love to work here and love how this facility is. We were excited for it.
LEBEAU: Fact is, many auto plants in the U.S. are close to capacity as the industry moves fast to keep up with strong sales, not only in America but around the world.
JEFF SCHUSTER: The peak hasn’t been reached yet. We’re seeing average age of the vehicle is well over 11 year on the road. So, more demand in production coming here in the U.S.
LEBEAU: Made in the U.S. headed for China, from a plant humming with activity once again.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Mishawaka, Indiana.
HERERA: And that’s NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera.
We want to remind you, this is the time of year your public television station seeks your support.
GRIFFETH: I’m Bill Griffeth. Thank you for watching. Have a great evening. We’ll see you tomorrow.
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