A daily market update from FS Insight — what you need to know ahead of opening bell

“At ten minutes to three in the morning, the city of Wells lay inert, hot and stagnant. Most of its eleven thousand people tossed restlessly; the few who couldn’t sleep at all damned the fact that there was no breeze to lift the stifling effect of the night. The heat of the Carolinas in August hung thick and heavy in the air.” — In the Heat of the Night

Overnight

BoE rate decision on a knife edge FT

Federal Reserve expected to keep interest rates steady, tee up September cut FT

E.U. prepares two-step trade plan to tackle Donald Trump FT

Venezuela’s Maduro declares victory and third six-year term after disputed election WSJ

America’s post-Covid factory boom is running out of steam WSJ

The cities where 20-somethings are still getting hired WSJ

Surge in commercial-property foreclosures suggests bottom is near WSJ

Investors embrace bond funds before rates start to fall WSJ

Larry Fink’s stately search for his successors FT

Roche to fast-track weight loss pill to compete with rivals FT

The hunt for a rare nuclear isotope that could redefine cancer care FT

The Carlyle outpost still investing in oil and gas FT

McDonald’s hit by first global sales drop since 2020 FT

The West Bank has so much cash its lenders are worried FT

YouTube sports viewing soars as streaming moves to big-screen TVs FT

First Solar searches for breakthrough to cut China’s clean energy lead FT

Singapore’s Temasek plans to invest up to $30 billion in U.S. over next five years RT

U.S., Germany call on citizens to leave Lebanon amid fears of war FT

Edna O’Brien, essential Irish writer, 1930-2024 FT

Chart of the Day

MARKET LEVELS

MORNING INSIGHT

Good morning!

This is a key week for macro data, but we expect it to be overall supportive of cyclical stocks, industrials XLI 0.47% , financials XLF 0.80% , and especially small-caps IWM 0.63% .

More in today’s Macro Minute Video linked HERE.

TECHNICAL

SPX and QQQ have successfully stabilized following the sharp two-week downtrends from mid-July. However, given that Treasury and German Bund yields are both lying near key support while SPX and QQQ are just below key resistance, it’s thought that this week’s Central Bank meetings (FOMC, BOJ, and BOE) could serve as the catalyst for upside breakouts in both Equities and Treasuries as markets get a bit more adjusted to policy. Movement over SPX-5492 and QQQ-468 could happen, coinciding with a breakdown in TNX this week under July lows at 4.144%.

Click HERE for more.

CRYPTO

On Saturday, Presidential Candidate Trump announced plans at the BTC Conference to establish a strategic Bitcoin reserve, initially funded by retaining the BTC -0.91% already held by the DOJ (approximately 1% of the total supply). He also reiterated the GOP platform that emphasizes supporting domestic mining companies, preventing a CBDC, and preserving the right to self-custody and private transactions. New points discussed included supportive comments on stablecoins and the desire to end Chokepoint 2.0. Shortly thereafter, Senator Lummis took to the stage to discuss a bill she will introduce to Congress, proposing that the US government purchase 1 million BTC -0.91% over five years to mitigate the effects of dollar debasement. We have explored various potential outcomes for this conference over the past few weeks, and this is undoubtedly the most bullish.

Cantor Fitzgerald plans to launch a Bitcoin financing business, providing leverage to investors who hold BTC -0.91% , with an initial allocation of $2 billion, expanding in $2 billion increments as needed. Announced by Chairman and CEO Howard Lutnick at a Bitcoin conference in Nashville, the business will partner with select Bitcoin custodians, though specifics were not disclosed. Lutnick emphasized Bitcoin’s global trade potential, likening it to gold, and highlighted Cantor’s substantial Bitcoin holdings. This initiative deepens Cantor’s involvement in the digital assets space, where it already acts as a custodian for Tether and has financed several crypto companies, including miners Bitdeer, TeraWulf, Riot Platforms, and Cipher Mining.

Click HERE for more.

First News

Get in Line, Jr. One driver of economic cycles, as per Hyman Minsky’s famous model, is supposed to be the self-referential nature of credit: i.e. when the mass of lending increases, some borrowers will use their loans to pay off other loans, while other borrowers’ spending will have the same effect indirectly. Wise to this, banks prefer to know when they’re granting credit in order to make purchases, and when they’re essentially becoming the junior lender – which is what happens when the money you lend goes to pay back some other debt. The range of consumer-debt options is always changing, and rules have to keep up; for example, Chase will no longer allow customers to use their credit cards to pay down buy-now-pay-later loans.

In corporate finance, borrowing anew to pay down existing borrowings is like dirt under your feet. There are also plenty of high net-worth people who make habitual use of credit lines or margin loans as sources of liquidity, so as to maintain the scope of their investments or avoid realizing capital gains. Yet at the lower end of the credit spectrum people and firms are engaging in the same behavior for a very different reason: running out of cash is always a risk to them, and when it becomes unavoidable, the last lender can end up taking the biggest loss.

That’s what’s happened to Wells Fargo on a pretty industrial scale and the results have been anything but. 

Two fateful years ago, Wells Fargo launched a credit-card collab with Bilt Technologies, a fintech startup featuring big-name backers on the order of Blackstone and Mastercard. The co-branded plastic boasted a rare perk: account holders could pay their rent with it without incurring fees from their landlords – while also earning rewards points. More than a million accounts were activated in the first 18 months, many by young adults – welcome by the bank as a demographic whose custom they could capture early in their financial ascendancy. The upshot?

Wells Fargo is losing as much as $10 million every month on the program as savvy customers flock to the card. Indeed, as a bank, you don’t want to offer high rewards on a category where your customers actually do spend all their money. What’s more, the economics of the rent transaction itself are highly disadvantageous for the bank.

Rent-seeking, literally

Most landlords don’t accept credit cards so as not to pay card fees running between 2% and 3%. Using its keen hearing to make out the first stirrings of a fool’s errand – believing that it was capturing an underserved market – Bilt eagerly structured its card so landlords wouldn’t incur the fees. Instead, Wells Fargo ate much of it up, paying Bilt a fee of ~0.80% of each rent transaction, even though the bank was not collecting interchange fees from landlords, instead hoping to earn interchange fees every time people use the card to pay for anything but rent, and splitting those fees with Bilt.

And so what we have here is a rewards card that pays you nothing in general but gives you 3% cash back on rent – often the largest; also the most budgeted for; monthly transaction. And therein lies the rub: if those young adults were carrying balances, Wells Fargo would get to charge them double-digit interest rates, but with a large expense that you already budgeted for (i.e. have the money for on hand), the incentives are all aligned for those money-savvy Millennial young adults to engage in – please pardon the pun – classic rent seeking. In other words, yes to rewards, no to carrying balances.

Using pie-in-the-sky projections, the bank assumed ~65% of card-purchase volume would be non-rent, i.e. generating interchange-fee revenue, i.e. profitable. In reality, just 15% to 25% of money charged to the card carried over from month to month, generating paltry interest charges.

Won’t Millennials just break your heart every time? TheDiff, Bloomberg, NYT, WSJ