Friday, April 4, 2014

Market Week Wrap-up  Weekly Market UpdateFed and ECB appear on course but markets left asking for directions

- Three great hopes helped put a bid under global equity markets in the first half of the week: hope for Chinese stimulus, ECB action and a monster US March jobs report. However in each case, disappointment was the main outcome. In China, the government unveiled a "targeted mini stimulus" with no price tag that rehashed investment priorities laid out by Beijing earlier this year. The ECB took no action at its monthly policy meeting on Thursday, and President Draghi repeated all of his familiar talking points. Draghi asserted that inflation would turn around of its own accord in coming months, although he did begin talking about the theoretical possibility of a quantitative easing program for the Eurozone if it can't. In the US, the March jobs report was good but not great, with NFPs slightly higher but other weak job trends also still in place. The trade data was sluggish with lower overseas demand weighing on US exports; leading economists to downgrade their outlooks for Q1 growth. In Japan, the government officially raised the sales tax from 5% to 8%, while weak Tankan survey data suggested that Abenomics is facing headwinds. Government bond markets remained firm helped by a confluence lackluster economic data, the belief that key central banks will stay with accommodative policies longer and asset allocation flows away from high beta momentum stocks. The US 10-year yield ended up little changed on the week finishing back below 2.75%. For the week, the DJIA rose 0.6%, the S&P500 added 0.4% and the Nasdaq fell 0.7%.

- Coming into the March jobs reports, there was a general feeling that the numbers would outperform expectations. This did not come to pass and both the +192K NFP and +192K private payrolls were a hair below expectations. However the February NFP was revised to +197K from +175K, putting the average monthly growth over the past three months at a healthy +178k. Many analysts were concerned about the flat hourly earnings component (they grew 0.4% in February) and the continuing weakness in underemployment. Both issues were cited by Yellen at her post-FOMC decision press conference as reasons for rates to remain low for an extended period.

- In the first half of the week, Brent crude fell to its lowest level since last November thanks to pressure from the prospect of Libyan oil returning to the market. Libya's eastern oil ports were seized by rebel groups demanding more political rights and a cut of the nation's oil revenue. Negotiations with the protesters have gone well and the two sides are close to reaching a deal which will reopen the oilfields and increase exports to 600K bpd from the current 150K bpd. Libya would still be operating below its 1.4 million bpd capacity, however the increase would have a significant impact on markets. Brent traded below $105 on Wednesday, with but climbed higher through week's end on fears the deal might fall apart.

- There was some calming of geopolitical tensions early in the week on reports that Russia had withdrawn some of the military assets from its border with Ukraine. Russia President Putin told German Chancellor Merkel that he had ordered a partial withdrawal of Russian forces from the border area. This news was disputed by western military figures, including US Defense Sec Hagel and NATO Chief Rasmussen. On Friday there were reports that the Pentagon was looking at the possibility of sending two combat brigades to the Eastern European NATO allies, most likely Poland.

- The "momentum stocks" got hammered again, particularly late in the week. Declines in high-profile tech names, selected biotechs and frothy recent IPOs drove the Nasdaq down nearly 3% on Friday alone, undercutting overall risk appetite. Tesla and Facebook both lost 8% a piece on Thursday and Friday, Netflix dropped as much as 6% at its worst on the two days and Amazon lost as much as 5%. Smaller tech names had an even worse time: recent IPO FireEye sank as much as 20% in the Wednesday-to-Friday period, while Splunk and Palo Alto Networks dropped 14% a piece over the same period.

- Auto sales in January and February were sluggish and the major manufacturers claimed that intense winter weather had kept traffic away from dealerships. The March data out this week seems to confirm the industry's excuses, as industry SAAR surged to 16.4M units, beating last year's 15.3 million mark. Analysts highlight that the industry increased incentives to lure more traffic. Fiat's Chrysler posted the largest sales increase, +13% y/y, the firm's best March since 2007. Jeep and Ram truck brands saw sales increases of 47% and 26%, respectively, making for Jeep's best sales month of all time. GM's sales were up 4%, although bad press from CEO Mary Barra's hammering on Capitol Hill over the ignition parts scandal obscured the firm's results. Ford sales were up 3%. Toyota March sales grew 4.9%, while Nissan sales grew 8.3%.

- At the post-rate decision ECB press conference, Super Mario stayed pretty close to all of his regular talking points regarding inflation and the scope for more action. Draghi conceded that the council did discuss potential rate cuts and the merits of a QE program (as well as lower rates and a negative deposit rate), but on inflation he doggedly repeated that while the March Eurozone inflation report was a surprise, the ECB still expects higher inflation in the months to come. Draghi claimed that seasonal factors, including the late Easter holiday, distorted March inflation levels, and asserted that approximately 70% of the fall-off in inflation was due to lower food and energy prices. He also highlighted that core inflation remains higher than headline CPI. Draghi's right-hand man, Governor Constancio, said low March inflation figures will correct in April. EUR/USD poked above 1.3800 a few times mid week, but the euro downtrend remains firmly in place and the pair closed the week just above 1.3700.

- Reports out this week suggested that Greece would return to the international bond market this month, four years after it became the first eurozone country to be bailed out. The country has made progress in fixing the nation's economy, and while the nation closed out its sixth year of recession in 2013, with Q4 GDP -2.6%, this was the best reading seen in years. The government aims to raise €2 billion in a sale of five-year bonds in April, with Deutsche Bank, Bank of America Merrill Lynch, JP Morgan and Goldman Sachs reportedly lined up as underwriters. Last month, Piraeus Bank sold €500 million in three-year bonds, and the sale garnered more €3 billion in orders. Other European peripheral bond markets performed well on hopes the ECB could ultimately chose to go down the path of QE. The Spanish 5-year yield fell below that of the US for the first time since 2007 and Portugal rates fell markedly too.

- Disappointing industrial production and consumer spending data raised hopes that China would launch some form of stimulus to cope with flagging growth. Early in the week, the March official manufacturing PMI was just about equal to the February reading, which itself was at eight-month lows. On Wednesday, Beijing announced a spending package focused on new railways and subways, low-income housing and tax breaks for small business. The government notably did not say how much it intends to pay for the package of targeted measures and analysts highlight that most measures were much the same as priorities mapped out at last month's central economic work conference. In addition, banks were tapped to "actively participate" in funding the projects highlighted by the plan. USD/CNY seems to have settled right in to a 6.20-6.21 range.

- The picture seen in the BoJ's first quarter Tankan survey was not terribly bright: Japanese business sentiment barely improved in the three months ending March and the corporate outlook is now considerably weaker than when Japan last raised its sales tax in 1997. The outlook for the next quarter suggests a notable slowdown. The survey revealed diminishing expectations of the economy being able to achieve the 2% inflation target, noting that firms of all sizes see CPI at 1.5% in one year and just 1.7% in five years. The BoJ meets next week but few expect any stimulus from the bank in the near term, as economist expect several months of data will be needed to gauge the impact of the sales tax hike. In the wake of the survey, Nomura economists forecasted more BoJ policy easing in July. USD/JPY ramped up to nine-week highs on Thursday and made a few runs above 104, but the risk-off tone on Friday drove the pair back down to 103.3.