TradeTheNews.com: : New Year's Blues
Fri, 02 Jan 2015 16:04 PM EST
Trading volumes were very light in the New Year's holiday week. Global equity
markets dipped during the final session of 2014 and then fell lower on the
first day of trading in the New Year as weak data and jitters about upcoming
Fed and ECB action drove risk appetite into the deep freeze. Manufacturing
industry data from around the globe out this week was not especially positive,
adding to the tepid atmosphere.
Looking back, 2014 was very good for major US equities: the S&P 500 rose
11% to 2,059, its sixth year of positive returns and its third straight year of
double-digit gains. The DJIA added 7.5% to 17,823 after slipping below 18,000
on the final two days of trading, and the Nasdaq advanced 13%. Small-cap stocks
were not quite as solid: the Russell 2000 climbed 3.5%. Europe's EuroStoxx 600
Index gained 3.9% on the year and Germany's DAX Index added 2.7%, although
France's CAC40 dropped 1.2%. Chinese equities had their best performance since
2009 even as overall emerging-market shares posted the first back-to-back
annual loss in 12 years.
US housing market data out this week remained tepid. The S&P/CaseShiller
October home price survey showed that real estate price gains slowing a bit.
The y/y gain dropped to +4.5% from +4.8% in September. Yale economist Shiller
commented that the housing market is fragile and is still reliant on low
interest rates. The November pending home sales m/m figure beat expectations
and returned to positive territory after October's contraction. The December
Chicago Purchasing Manager survey and the ISM Manufacturing Index missed
expectations, hitting their lowest levels since mid-2014.
Oil prices sagged to fresh five-year lows, with front-month WTI dropping from
the mid-$55 area on Monday as low as $52.50 on Wednesday. The contract bounced
off the lows but by Friday came very close to the $52 level. Brent crude
bottomed around $55.50 but closed out the week around $56. Interestingly the
oil equities themselves continue hold up better. The OIH and XLE remain above
their mid-December lows which expedited the latest move to fresh all-time highs
for US stock indices.
Comments from ECB President Draghi and ECB Chief Economist Praet left little
doubt that quantitative easing is imminent. On Tuesday, Praet said euro zone
inflation was below 0% and would stay there for an extended period. The
official December euro zone CPI reading is out next week could cement
expectations for European QE after the November reading matched a 4-year low at
0.3%. Praet argued that sovereign bonds were the only asset class with enough
volume to make an impact on the inflation issue. Draghi was less sanguine, but
highlighted that the risk of deflation in euro zone cannot be ruled out.
Unsurprisingly, various German figures refuted these assertions. Germany's 'wisemen'
said there was no deflation while the CDU Deputy party Chairman Fuchs said the
euro zone was no longer obligated to rescue Greece as they were no longer
systemically important. Between imminent QE and the Greek situation, EUR/USD
gravitated toward the psychological 1.2000 level (though did not break through)
and the 10-year bund yield fell to fresh all-time lows of 0.49% while the
5-year now offers a negative yield for the first time ever.
The Greek political crisis helped push yield spreads to fresh record levels as
the Greek 10-year yield approached 10% even as most other EU government bonds
are at or near record low yields. After lawmakers rejected the government's
candidate for president last weekend, Greek PM Samaras was forced to dissolve
the parliament and call a general election on January 25th. Polls showed
Syriza, the leftist, anti-bailout opposition party of Alexis Tsipras, to be the
frontrunner in the race. Tsipras has promised to get a better deal from the
Troika on Greece's bailout payments. The EU has sternly warned that any new
government must abide by prior obligations, suggesting that in the event of a
Syriza victory irreconcilable differences could lead to a "Grexit."
China's official December Manufacturing PMI survey hit its lowest level since
mid-2013, even as the non-manufacturing survey recovered to a four-month high.
Manufacturing PMI components New Orders and Output were at 2014 lows, and
inventories and employment were at 10-month lows. November industrial profits
data fell by 4.2%, the largest y/y decline in 27 months. The PBoC published a
report confirming that the government would change the rules on loan-to-deposit
ratio calculations in 2015 to inject further liquidity into the system. The new
rules would allow the inclusion of savings held by banks for non-deposit-taking
financial institutions in banks' deposits, expanding the ratios and boosting
In Japan, Prime Minister Abe continues to fine-tune his efforts to extinguish
deflation and jumpstart the economy. The government said it is planning a $29B
(¥3.5T) fiscal stimulus package, featuring subsidies for households to help
stimulate consumption along with more relief for earthquake-hit areas. The plan
is estimated to add 0.7% to 2015 GDP growth. The government also announced it
would aim to cut the corporate tax rate to below 30% over the next several
years. The FY15/16 tax reform will cut the corporate rate to 32.1% from 34.6%.