TradeTheNews.com Weekly
Market Update: Tory Surprise and US Jobs Report Save the Week
Fri, 08 May 2015 16:30 PM EST
Global equities lost altitude through Thursday as the parade of poor economic
data and bond market choppiness continued. Early in the week, the ADP jobs
report raised real worries that the US would see another anemic payrolls number
for April, while Chinese trade data was concerning. There was no breakthrough
on Greece, with both sides seemingly committed to forcing negotiations down to
the wire. The global bond market rout continued apace this week and the surge
in yields kept pressure on stocks worldwide, nudged further by Fed Chair Yellen
weighing in on equity valuations. The stampede out of stocks and bonds sent
European indexes to their lowest levels in two months. Note that the UST
10-year yield peaked just below 2.3% on Wednesday and then headed back below
2.12%, while the 10-year Bund peaked around 0.777% on Thursday and quickly
dropped below 0.540% by Friday. The surprise landslide victory by the
Conservative government in UK elections and Friday's not-too-hot, not-too-cold
US jobs report helped equities recoup their losses for the week, with DJIA
gaining 0.9%, the S&P500 adding 0.4% and the Nasdaq ending just above flat.
Fed Chair Yellen raised eyebrows on Wednesday after commenting on equity market
valuations in a panel discussion. "I would highlight that equity market
valuations at this point generally are quite high," said Yellen.
"There are potential dangers there." Commentators compared Yellen's
remarks to her call on biotech valuations a year ago as well as Alan
Greenspan's notorious "irrational exuberance" comments. "We've
also seen the compression of spreads on high-yield debt, which certainly looks
like a reach for yield type of behavior," added Yellen. She also warned
that another potential trouble spot was low long-term interest rates, which
could spike as the Fed normalizes its policy, causing disruption across the
financial system.
On Thursday, European bond yields had a serious hiccup, with the yield on the
German 10-year Bund surging by as much as 21 bps to 0.80%, its highest level
since last November, before easing back below 0.60%. Interestingly, peripheral
Europe yields saw weaker gains and then fell significantly as buyers stepped
in. There was no apparent proximate cause for the spike, besides a general lack
of liquidity. Analysts have begun watching the rebound in yields with a certain
degree of skepticism: the oil price rebound helped blunt fears of outright
deflation, relieving some of the pressure on yields. The euro has reversed
course and has begun strengthening, and European stocks have been heading lower
in the face of Greek chaos. Economic data is not showing a big improvement in
the real economy.
The April jobs report showed the US labor market bounced back firmly from the
anemic March results. April non-farm payrolls rose to 228K, about in line with
expectations, but the March figure was slashed to 86K from the already
disappointing 126K. Unemployment fell to 5.4% from 5.5% in March. Hourly
earnings fell slightly, raising worries that wage pressures were not sufficient
to deliver much more economic growth. The biggest jobs growth was in
white-collar and healthcare sectors, construction saw modest gains, while
manufacturing was flat.
The US trade deficit rose 43% y/y to $51.5 billion in March (a six-month high),
reflecting a surge of imports that followed the settlement of the West Coast
port dispute. Exports edged up 0.9% to $187.8 billion, but imports leaped a
record 7.7% to $239.2 billion. Economists say the numbers were less favorable
than those used to calculate advance Q1 US GDP, however it remains unclear how
much the imports will boost March inventory numbers and their impact on Q1 US
GDP revisions.
UK Prime Minister David Cameron won an absolute majority in Britain's
Parliamentary elections, taking 326 of the 650 seats up for grabs in the House
of Commons. The outcome was surprising after weeks of polls that had been
predicting a dead heat between Labour and the Conservatives. Labour's Ed
Miliband said he would step down as party leader after his party's share fell
to 229 seats from 258 prior. Nick Clegg resigned as leader of the Liberal
Democrats after a disastrous result for his party, whose representation fell to
eight seats from 57 prior.
Negotiations between Europe, the IMF and Greece went back and forth again this
week and became even more divisive. Greek Finance Minister Varoufakis
reinserted himself in the mix, denying he had been sidelined and claiming he
was prepared to go "down to the wire" in talks. Greece made its
payment to the IMF this week, while the next big payment is €745 due on May
12th. There were no signs that the two sides would be able to reach a deal at
the Eurogroup meeting on Monday, May 11th. The ECB doled out another ELA
expansion to the Greek banking system but deferred making a decision on
collateral haircuts to next week. The ECB has used bank collateral obligations
as a bargaining chip in bailout negotiations, and by deferring the decision it
allows the EU to put a bit more pressure on the Greeks.
The gains in oil prices continued through midweek, with WTI coming within a
dollar of the $70 level on Wednesday after the DoE weekly report included the
first draw-down in crude inventories since early January. There has been a
persistent feeling that the worst of the oil rout is over and prices were
seeking a new, higher level, however traders warned of persistent weakness in
the physical market (and it was softness in crude deliveries that wreaked havoc
late last summer). EIA and OPEC data shows the world still producing more oil
than it consumes, and a report that Iranian oil production capacity would be
around 3.96M bpd in 2016 helped take futures off their highs.
The March quarter earnings season is slowly winding down. Ecommerce giant
Alibaba saw revenue up nearly 50%, with users and mobile metrics rising
sharply. Chairman Jack Ma also decided to reinvigorate his management team by
bringing in a new CEO. Comcast hit an important milestone, as subscribers for
internet service now outnumber cable TV subscribers. Sprint's headline numbers
were a bit disappointing, but its widely watched churn rates improved. Green
Mountain tanked after missing top- and bottom-line expectations and cutting its
FY forecast. Whole Foods said it would launch a new "value-oriented"
chain, upsetting some investors. Metlife and Prudential reported firm first
quarter results.
McDonalds unveiled its big turnaround strategy. The main focus will be
reorganization into four new corporate segments in an effort to strip away
unwanted layers of management. McDonald's will also refranchise more than 3,000
restaurants through 2018, bringing its total percentage of franchised
restaurants to 90% from 81% globally. Improving food quality will be a top
priority. Friday MCD reported April SSS that were down again, by 0.6% globally,
but the stock rallied after the decline was less then generally expected.
Lumber Liquidators suspended sales of Chinese laminate flooring, bowing to
accusations that the products had dangerous levels of formaldehyde. The firm
insisted that while 97% of 26,000 indoor air quality tests with kits provided
by the company came back clear, it would suspend sales until a special
committee looking into all allegations wrapped up its work. The sudden gain in
LL's stock price after the announcement evaporated within hours. Meanwhile,
activist Whitney Tilson told CNBC that the development would be the decisive
point in the eventual collapse of Lumber Liquidators and disclosed he had
"materially increased" his short position.
Alexion Pharmaceuticals agreed to pay a huge premium to buy rare disease
specialist Synageva BioPharma for $8.4 billion in cash and stock. Notably,
Synageva has no products on the market. Alexion officials said the deal will
help their company accelerate and diversify its revenue growth and expand its
manufacturing abilities. Alexion's shares tumbled after the deal was announced
as investors decided the firm was overpaying.
Trade data out of China showed more signs of slowing growth in the domestic
economy. April imports declined for the sixth month in a row, and it was the
fourth consecutive month in which imports dropped by a double digit percentage.
Chinese exports fell for the second straight month, dismissing hopes of a
seasonal rebound while adding to the expectation the PBoC is close to stepping
in again. Meanwhile, the China April final HSBC manufacturing PMI sank lower,
racking up the biggest contraction in a year. The Shanghai Composite traded
down by over 7.5% at its low point of the week before Friday's 2% rally on rate
cut expectations. Inflation data due out early Saturday morning in China is
expected to show CPI continuing a rebound off of five-year lows registered in
January.
