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Deborah D Souza

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Salesforce, Amgen and Honeywell are in after Apple split prompts shake up.

  • Dow 30 shuffle due to Apple stock split and need to diversify, reflect economy
  • Exxon, Pfizer and Raytheon being removed effective August 31
  • Salesforce, Amgen, Honeywell to take their place

Major changes are coming to the widely-watched Dow Jones Industrial Average (DJIA) benchmark index. Before the opening of trading on August 31, Salesforce.com will replace Exxon Mobil, Amgen will replace Pfizer, and Honeywell International will replace Raytheon Technologies on the 30-stock, blue-chip index.

S&P Dow Jones Indices, the company behind the index, said the changes were prompted by constituent Apple’s decision to split its stock 4:1. The iPhone maker’s share price will fall to around $120 at the end of the month, and since the Dow is price-weighted, this will reduce its exposure to the information technology sector.

The biggest shakeup to the index since 2013 will help offset that reduction and also diversify representation by “removing overlap between companies of similar scope and adding new types of businesses that better reflect the American economy,” said the press release. This won’t disrupt the level of the index since the index divisor used to calculate it will be changed prior to the opening on August 31, 2020.

Source: S&P Dow Jones Indices.

“Basically Apple — by itself — took the technology [weighting] within the Dow down from 27.6% to 20.3%. It’s a significant decline,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told CNBC. “By adding Salesforce, you can come back to 23.1% of the Dow being in technology.”

Dow sector weightings as of July 31 2020. Source: S&P Dow Jones Indices.

The Dow was created in 1896 by Charles Dow and originally consisted of a dozen industrial companies. Exxon Mobil first joined it in 1928 when it was known as Standard Oil of New Jersey. The oil and gas company is the oldest current member and is being dropped after almost a century to be replaced by cloud computing leader Salesforce. Chevron will soon be the only energy company on the index left.

Author: Deborah D’souza

Source: Investopedia: Exxon Ejected From Dow in Biggest Shake Up Since 2013

  • The price of gold has risen past $1,800 psychological level
  • Spot gold up 17% in the first six months of 2020
  • Gold ETF net inflows in H1 2020 exceeds full year record set in 2016
  • COVID-19 uncertainty, central bank actions, weak dollar pushing price higher
  • SPDR Gold Shares and iShares Gold Trust see greatest inflows

This morning the gold spot price crossed the key $1,800 an ounce level for the first time since 2011. This comes against the backdrop of bullish forecasts. Goldman Sachs expects the metal could reach $2,000 in the next 12 months, and Bank of America sees it touching $3,000 an ounce in 18 months. Its all-time record of $1,921.17 was set in September 2011.

Gold has been surging this year, despite demand for jewelry, gold bars and coins declining in big markets like India and China, due to Western investors seeking safety in the asset. The global net inflows into Gold ETFs was $39.5 billion in the first half of this year, according to the World Gold Council. This already exceeds the record set for highest annual inflows set in 2016 ($23 billion). Even going by tonnage, in just six months it beat the previous full year record of 646 tonnes in 2009 by almost 100 tonnes. The demand has been so extraordinary, inflows in the first half of 2020 significantly exceeded multi-decade record levels of net gold purchased by central banks in 2018 and 2019.

Source: World Gold Council.

As economies confronted uncertainty related to the pandemic and central banks introduced stimulus and cut interest rates, gold-backed funds have seen seven consecutive months of positive flows as of June. “Speculation over the potential impact of a second wave of COVID-19 infections on an already fragile global economy caused a renewed wave of fear and uncertainty. Meanwhile, ongoing asset purchases by central banks to mitigate the impact of the pandemic further reduced the opportunity cost of holding non-yielding assets such as gold,” said the report. Also set to possibly push prices higher is the weakening U.S. dollar.

As the price of gold rose 17% over the first half of the year, global gold ETF holdings (in tonnage terms) increased by 25%. Global daily trading volumes reached a record $233 billion per day in March and was at $156.9 billion per day in June, comfortably above the 2019 daily average of $145.7 billion. By the end of June, gold-backed ETFs held 3,620 tonnes of gold worth $206 billion.

The SPDR Gold Shares and iShares Gold Trust funds lead the ranking of funds with greatest inflows in dollar/tonnes terms during H1. See the rest below.

Source: World Gold Council.

Author: Deborah D’souza

Source: Investopedia: Gold Prices Surge Amid Record ETF Inflows

  • Fed to buy $750 billion in corporate bonds and ETFs containing them
  • The majority of ETFs chosen will hold investment-grade debt
  • The SMCCF will buy individual corporate bonds “in the near future.”

The Fed’s brand new program, the Secondary Market Corporate Credit Facility (SMCCF), will start buying U.S.-listed corporate bond ETFs today as part of the effort to support the economy. “The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds,” said the statement from the New York Fed.

Other factors that will determine if an ETF is chosen will be:

  • composition of investment-grade and non-investment-grade rated debt
  • management style
  • amount of debt held in depository institutions
  • average tenor of underlying debt
  • total assets under management
  • average daily trading volume, and leverage, if any

BlackRock is the investment manager, but they wouldn’t dare ignore other issuers’ funds as well

The historic announcement that the central bank would buy corporate bonds and exchange traded funds that held them was made on March 23. It spurred a fierce rally as investors tried to guess where liquidity was headed. On April 9, the Fed added “fallen angels,” or companies whose debt recently fell into “junk” status, to its shopping list. Seeing a voracious appetite, companies rushed to issue debt and build their war chests. According to Credit Flow Research, about $575 billion in investment grade debt has been issued since March 23.

The total value of the bond purchases made through the the SMCCF and the Primary Market Corporate Credit Facility (PMCCF) is expected to be up to $750 billion. The Treasury Department has so far invested $37.5 billion of the $75 billion equity investment it committed to support these programs as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The SMCCF will start buying individual corporate bonds and the PMCCF will become operational “in the near future.”

The big question now is, will the Fed conjure up a way to buy stocks or index-tracking ETFs and at what price point? It sounds extremely improbable, but so did corporate bond-buying a while ago. Vincent Deluard, global macro strategist for brokerage INTL FCStone, told Bloomberg that as companies halt buybacks, it will leave “a permanent $500 billion-plus gap in the equity supply-and-demand picture.” He said, “So as you remove that, you will need to fill it. I don’t think the retail bid, this is a cute story and I’m glad people are making money, but I don’t’ think it’s a sustainable source of demand. I only see one possible actor, and that’s the Fed.”

While investors initially liked the news on April 9, that the Fed would be buying high-yield bond ETFs, the response has been tepid since. We’ll see if that changes today.

Author: Deborah D’Souza

Source: Investopedia: Fed Kicks Off Unprecedented Corporate Bond-Buying Program

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