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Big tobacco, big oil and Buffett join Fed's portfolio

WASHINGTON (Reuters) – The U.S. Federal Reserve bought $428 million in bonds of individual companies through mid-June, making investments in household names like Walmart and AT&T as well as in major oil firms, tobacco giant Philip Morris International Inc, and a utility subsidiary of billionaire Warren Buffett’s Berkshire Hathaway holding company.

The transactions disclosed Sunday are the first individual company bond purchases made by the Fed under new programs set up to nurse the economy through the coronavirus pandemic. The Fed also added $5.3 billion in 16 corporate bond exchange traded funds, including a newly added sixth high yield fund.

The initial round of purchases included some 86 issuers, about half of them contractually settled as of June 18 and some still underway, all bought on the secondary market.

That is a small slice of the more than 790 issuers whose bonds the Fed has said in a separate release were eligible for purchase.

But it was still a first foray into corporate bond purchases that spread broadly across the economy, touching firms like Gilead Sciences that are involved in developing treatments for the COVID-19 disease caused by the novel coronavirus, as well as major automakers. That included Ford Motor Co., whose credit was downgraded to junk status after the Fed announced its intent to buy corporate debt.

Both the Bank of Japan and the European Central Bank have programs to buy individual corporate bonds, but the Fed only added that to its arsenal in light of the Depression level risks posed by the pandemic. The aim is to ensure companies can continue to finance themselves, and not be forced out of business due to problems raising cash during a pandemic. The program is backed by investment capital from the U.S. Treasury to absorb any losses should corporations default.

The largest purchases were of bonds issued by AT&T and the United Health Group, with the Fed buying around $16.4 million of bonds from each.

Issuers in the energy industry accounted for about 8.45% of the bonds purchased, about a percentage point less than their representation in a broad market index that the Fed says its purchases are intended to track over time.

The Fed’s bond purchases and other emergency programs will be scrutinized by lawmakers at a Tuesday hearing before the House Financial Services committee with Fed chair Jerome Powell. Questions may focus on the individual bonds purchased, but also on the fact that support for the bond markets used by major firms is now up and running and getting billions of Fed support, while the Fed’s Main Street Lending Program for smaller companies has yet to make a loan.

The central bank’s programs overall have so far seen modest use. The central bank’s overall balance sheet has declined for the past two weeks, falling to $7.08 trillion more recently as foreign governments made less use of Fed dollar swap lines.

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Visa and Mastercard may cut ties with Wirecard amid scandal

NEW YORK • Visa and Mastercard are considering revoking Wirecard’s ability to process payments on their networks, in a move that would cause further pain for the firm after it started insolvency proceedings.

The world’s largest payment networks have begun reaching out to some Wirecard clients to prepare them for the possibility, according to sources.

“We continue to closely monitor developments and assess new information as it becomes available,” Visa said on Thursday. “Our priority is, and will always be, maintaining the integrity of the Visa payments system and protecting the interests of consumers, merchants and our clients.”

Wirecard helps businesses around the world accept electronic payments from customers, so its relationships with Visa and Mastercard – and being able to process payments with the companies – are critical to its business.

“Mastercard is aware of the news regarding Wirecard AG and is monitoring the situation closely,” Mastercard said. “Our priority is ensuring people are able to continue to use their cards. We will continue to work with all parties and stand ready to take any necessary action.”

Wirecard filed for insolvency on Thursday, citing over-indebtedness and inability to assure it can continue as a going concern. The announcement was the culmination of a stunning accounting scandal that led to the arrest of its chief executive and left the German payment-processing firm unable to find €1.9 billion (S$3 billion) missing from its balance sheet.

Losing the licences from Mastercard and Visa would exacerbate Wirecard’s situation. The company will have “no business” should the credit card companies decide to sever ties, Mirabaud analyst Neil Campling has said.

The payments company has seen many other clients turn their backs on it since the scandal broke a week ago. Its share price has been down 97 per cent since then.

Wirecard Bank, where the Visa and Mastercard licences are held, is not part of the insolvency proceedings, the company has said. German financial regulator BaFin has appointed a representative for the lender.

“In future, the release processes for all payments of the bank will be located exclusively within the bank and no longer at group level,” Wirecard said on Thursday.

A representative for Wirecard said it is currently not making any additional statements.

BLOOMBERG

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Under Armour to discontinue record apparel partnership with UCLA

(Reuters) – Athletic apparel maker Under Armour (UAA.N) said on Saturday it will discontinue its partnership with UCLA – a 15-year, $280 million accord announced in 2016 that was billed as the largest apparel deal in the history of the American collegiate sports.

The University of California, Los Angeles promised to fight the move.

The Baltimore-based company said in an emailed statement that it made the decision to terminate the agreement with UCLA – a member of the Pac-12 athletics conference – because “we have been paying for marketing benefits that we have not received for an extended time period.”

The agreement with UCLA allowed the company to terminate the deal in such an event and it is exercising its right, Under Armour added.

“We are exploring all our options to resist Under Armour’s actions,” UCLA said in a statement. “We remain committed to providing our hard-working staff and student-athletes with the footwear, apparel and equipment needed to train and compete at the highest level.”

Under Armour has competed with other leading apparel makers for agreements with major intercollegiate sports programs.

In May 2016, the company in a news release touted the agreement, which took effect in 2017, as “the largest apparel deal in the history of the NCAA (National Collegiate Athletic Association), reaffirming UCLA’s status as a world-class institution and Under Armour’s position as a global leader committed to collegiate athletics.”

As part of the partnership, Under Armour was to have exclusively designed and supplied the footwear, apparel and equipment for training and game-day uniforms for all of UCLA’s men’s and women’s varsity athletic teams, according to the 2016 company news release.

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Carlyle buys 20% stake in Piramal Pharma businesses

(Reuters) – U.S.-based Carlyle Group Inc has agreed to buy a 20% stake in the pharmaceutical unit of Indian conglomerate Piramal Enterprises Ltd for about $490 million, the companies said in a statement on Saturday.

Piramal Pharma will use the capital injection to accelerate its organic and inorganic growth plans, the statement said.

The investment comes a month after the private equity firm bought a majority stake in Indian animal healthcare company SeQuent Scientific Ltd.

“India is a hugely strategic part of Carlyle’s Asia business, and a market where we continue to see many attractive investment opportunities,” Greg Zeluck, Co-Head of Carlyle Asia Partners advisory team said.

Earlier this month, India’s Economic Times reported that Carlyle had emerged as the frontrunner to grab a minority stake in the pharma unit of business mogul Ajay Piramal, with U.S. private equity firms TA Associates and KKR & Co Inc also submitting offers for the 20% stake.

The transaction is expected to close in 2020.

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Carlyle buys 20% stake in Piramal Pharma businesses

(Reuters) – U.S.-based Carlyle Group Inc has agreed to buy a 20% stake in India’s Piramal Enterprises Ltd’s pharmaceutical businesses for about $490 million, the companies said in a statement on Saturday.

The capital increase aims to accelerate Piramal Pharma’s organic and inorganic growth plans, according to the statement.

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Investors eye economic data, stimulus measures as stocks rally stalls

NEW YORK (Reuters) – Upcoming U.S. economic data and deadlines for renewing some fiscal stimulus measures in July could prove key tests for an equities rebound that has wavered in recent weeks.

The benchmark S&P 500 has risen about 34% from its late March lows. But those gains have slowed in June, as investors weigh expectations of further stimulus and improving data against a resurgence in coronavirus cases in the United States.

Investors will look to a raft of U.S. data next week – including reports on employment, consumer confidence and manufacturing – for clues on whether a nascent rebound in the U.S. economy remains intact.

Improvements in some economic indicators, such as home sales, manufacturing activity and an unexpected bounce in employment data last month, have bolstered investor confidence and helped extend the rally in stocks. But others, including scant declines in jobless claims, reflect a still-tentative recovery.

“There’s some evidence that the economy is expanding, but how robust it will be is an open question,” said David Joy, chief market strategist at Ameriprise Financial.

Market participants are also looking for clues on whether lawmakers are likely to push through more fiscal stimulus measures in coming weeks.

The House of Representatives passed another $3 trillion aid bill in May, but the Republican-controlled Senate has not taken up the House package and lawmakers are not expected to move toward another coronavirus bill until sometime in July.

One component of Congress’ fiscal aid, a $600 per week supplement to unemployment insurance payments, is set to expire at the end of July.

Michael Wilson, chief U.S. equity strategist at Morgan Stanley, said that bill is critical to the bank’s thesis for a “V”-shaped U.S. economic recovery.

“Our outlook for the economy is probably going to have to change” without further stimulus, he said.

The looming deadline has added to a cluster of worries that have limited stocks’ gains this month. U.S. stocks tumbled this week, including a more than 2% drop on Friday, in response to a resurgence in the number of cases of COVID-19, the disease caused by the novel coronavirus.

Even with that recent pullback, stock valuations, as measured by forward price-to-earnings ratios, are near their highest level since the 2000 dot-com boom.

Other sources of worry include a potential flare-up in U.S.- China trade tensions and political uncertainty stemming from the Nov. 3 presidential election.

Some investors have already begun preparing for a potential market downturn by lightening their stock positions.

Oliver Pursche, president of Bronson Meadows Capital Management, said he recently sold shares of some tech-related companies, such as Amazon.com Inc., in order to raise his cash allocation. Likewise, Richard Grasfeder, senior portfolio manager at Boston Private, has moved to a slight underweight position in U.S. equities.

In Grasfeder’s view, it could take longer than expected to see the impact of additional stimulus in economic data and corporate earnings.

“It’s going to take a while for those funds to flow through the economy,” he said.

Nonetheless, many on Wall Street remain confident that further aid will pass, given the presidential and congressional elections this November, and that will help prop up investor sentiment.

“My suspicion is it will happen before the July expiration,” said Ameriprise’s Joy. “You wouldn’t want to alienate your constituents unnecessarily.”

At the same time, some investors believe expectations that the Federal Reserve is ready to step in with further monetary support should the economy begin to falter will limit the downside in stocks and other risk assets.

Still, expectations for future market gyrations, as reflected by the Cboe Volatility Index, have remained elevated. Some volatility watchers believe markets could be choppier than usual this summer as investors await the passage of further stimulus and additional signs of economic recovery.

“It’s going to end up being a more volatile summer than traditionally is priced into the market,” said Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets.

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Wall Street ends lower as coronavirus surge prompts renewed restrictions

NEW YORK (Reuters) – Wall Street’s major indexes tumbled more than 2% on Friday as several U.S. states imposed business restrictions in response to a surge in coronavirus cases.

Some U.S. states that were spared the brunt of the initial coronavirus outbreak or moved early to lift restrictions are seeing a resurgence in new infections. On Friday, Texas and Florida ordered bars to close down again.

“You’re seeing a pretty dramatic increase in cases,” said Kevin Grogan, managing director of investment strategy at Buckingham Strategic Wealth in St. Louis. “If people start feeling again like it’s not safe to eat out or go shopping, that could have a really negative impact on the stock market.”

A Wall Street Journal report that the Phase 1 U.S.-China trade deal could be at risk placed additional pressure on U.S. stocks. According to that report, Chinese officials warned that “meddling” in Hong Kong and Taiwan could lead Beijing to back away from its commitment to purchase U.S. farm goods.

“It added another log into the risk aversion fire,” said Edward Moya, senior market analyst at OANDA in New York, of the report on China.

Among sectors, financial, communication services and energy shares outpaced the broader S&P 500 in declines. S&P 500 bank shares plummeted 6.1% after the Federal Reserve limited dividend payments and barred share repurchases until at least the fourth quarter following its annual stress test.

Renewed concerns over the novel coronavirus pandemic have threatened to derail a strong rally for Wall Street that has erased much of the S&P 500’s steep losses from March. The benchmark index ended below its 200-day moving average, an indicator of long-term momentum.

The uptick in coronavirus cases likely triggered a test of that technical level, said Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis.

The Dow Jones Industrial Average fell 730.05 points, or 2.84%, to 25,015.55, the S&P 500 lost 74.71 points, or 2.42%, to 3,009.05 and the Nasdaq Composite dropped 259.78 points, or 2.59%, to 9,757.22.

For the week, the S&P 500 fell 2.87%, the Dow lost 3.31%, and the Nasdaq shed 1.87%.

Facebook Inc shares shed 8.3%, weighing the most on the S&P 500, after Unilever PLC and Verizon Communications Inc joined an advertising boycott that called out the social media giant for not doing enough to stop hate speech on its platforms.

Nike Inc shares dropped 7.6% as the footwear maker, hurt by store closures due to the pandemic, posted a surprise quarterly loss.

Gap Inc shares surged 18.8% after the retail chain entered a 10-year deal with rapper and fashion designer Kanye West to create a line of clothing under his Yeezy brand.

Friday also marked the reconstitution of the FTSE Russell indexes, including the large-cap Russell 1000 and small-cap Russell 2000. Daily trading volume is often among its highest levels of the year during the reconstitution, though volume this year has spiked on several occasions amid steep market sell-offs.

Volume on U.S. exchanges was 16.43 billion shares, compared to the 13.44 billion average for the full session over the last 20 trading days.

Declining issues outnumbered advancing ones on the NYSE by a 3.99-to-1 ratio; on Nasdaq, a 3.57-to-1 ratio favored decliners.

The S&P 500 posted five new 52-week highs and no new lows; the Nasdaq Composite recorded 59 new highs and 28 new lows.

(This story refiles to fix grammar in paragraph seven)

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U.S. bank shares drop as Fed sets limits following stress tests

NEW YORK (Reuters) – Shares of U.S. banks dropped on Friday, with Wells Fargo’s (WFC.N) stock falling more than 6% and Goldman Sachs Group Inc (GS.N) down 7%, after the Federal Reserve capped dividend payments and barred share buybacks until at least the fourth quarter after its annual stress test.

The S&P 500 banks index .SPXBK was down more than 5% and the S&P 500 financials index .SPSY dropped nearly 4%, making it the biggest drag on the S&P 500 .SPX in Friday’s broad market selloff.

The drop in bank shares is in part tied to worries about how well the economy is likely to recover from the impact of the coronavirus pandemic, said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.

“Overall it does suggest that the Fed is concerned about the strength of the recovery, and the effect it will have on banks. I think it was expected by the market but not to this extent,” Krosby said.

“The market is focused on anything that could jeopardize the economic recovery,” she said.

The S&P 500 was down about 2% at midday Friday, with worries about a surge of new coronavirus cases in the United States also hitting the market. Shares of JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N) and Bank of America Corp (BAC.N) all were down roughly 5%.

The Fed announcement late on Thursday followed a day of gains in bank shares after U.S. banking regulators unveiled new rules that will make life easier for large banks with complex trading and investment portfolios.

Wall Street analysts said some of the banks being hit the hardest on Friday, including Wells Fargo and Capital One Financial (COF.N), down 8.3%, have been viewed as among the most at risk of having to cut their dividends.

Chris Marinac, research director at Janney Montgomery Scott, said Wells Fargo has been projected to pay out more in the third quarter than its average earnings from the previous four quarters.

But he said banks overall had already suspended share buybacks and the Fed limit on dividends as a percentage of past income will not affect all banks.

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Nike plans to cut jobs in digital push

(Reuters) – Nike Inc (NKE.N) on Friday warned of job cuts as the world’s largest footwear maker ramps up efforts to sell directly to customers through its online and retail channels.

The planned layoffs come after the company on Thursday reported a $790 million quarterly net loss, its first in more the two years, as its wholesale business bore the brunt of footwear retailers and department stores shutting down due to the coronavirus outbreak.

Shares of the Dow component were down 6% in morning trading on Friday.

“We are shifting resources and creating capacity to reinvest in our highest potential areas, and we anticipate our realignment will likely result in a net loss of jobs,” Nike said in an e-mail statement.

“Reductions are not being done for cost savings. Any savings will be reinvested into our priorities,” the footwear maker said.

Chief Executive Officer John Donahoe told analysts on Thursday the company would now aim for digital to account for 50% of its overall business, up from the 30% recorded in the reported quarter.

“Our vision is to create a clear and connected digital marketplace … So we’re accelerating our approach,” he said.

Donahoe, a former ServiceNow CEO and eBay (EBAY.O) executive, joined Nike earlier this year as the company was bolstering its direct-to-consumer business.

According to media company Complex, Donahoe in a letter to employees said the company does “not yet know how many jobs will be reduced, nor who will be specifically impacted.” (bit.ly/31lsziW)

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Supermarket operator Albertsons' shares reverse course in NYSE debut

(Reuters) – Shares of Albertsons Cos Inc ACI.N reversed course in their U.S. market debut during early trading on Friday, after opening 3% lower than their initial public offering price.

Shares of the supermarket operator now up 1.4% at $16.22, giving the company a valuation of $9.4 billion.

Albertsons on Thursday said it sold 50 million shares in the IPO at $16 apiece, missing its target of 65.8 million, and raised $800 million. The shares were earlier marketed at $18-$20 apiece.

The company ended the IPO market’s longest streak of days without a single deal pricing below targeted range since 2009, according to Renaissance Capital, which tracks IPOs.

The COVID-19 pandemic gave a boost to Albertsons’ revenue as consumers stocked up on food during lockdowns. Sales in March and most of April were up 34% from a year earlier. The scaling back of the IPO, however, indicated investor skepticism.

Rival supermarket chain Kroger Co (KR.N) said last week the surge in demand for essential goods it saw during the coronavirus outbreak was fading, as American households reconsider their needs.

Albertsons’ IPO was a culmination of multiple attempts by its private equity owner Cerberus Capital Management LP to cash out. Following the debut, Cerberus will own around 31.9% of the company.

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