TradeTheNews.com Weekly
Market Update: Turkey Tensions Strain Otherwise Quiet Market
Fri, 27 Nov 2015 14:49 PM EST
Trading action was subdued this week as the US Thanksgiving holiday made
markets sleepy. New growth and inflation data did nothing to deter the
expectation of Fed rate liftoff in December. Global tensions briefly ratcheted
up after Turkey shot down a Russian warplane that strayed into its airspace,
further complicating the fight against ISIS in Syria. The euro continued to
weaken in anticipation of the ECB monetary policy meeting next week where the
central bank could expand its QE program and further cut key rates. Chinese
stocks fell hard on Friday on a new round of crackdowns on brokerage houses,
but stocks outside of China did not react significantly to the news. For the
week, the DJIA lost 0.1%, the S&P500 was up less than 0.1%, and the Nasdaq
edged up 0.4%.
Two more key pieces of the US monetary policy puzzle dropped this week: GDP and
PCE inflation. There were no big surprises in the second reading of Q3 GDP. The
main components met expectations, with the q/q annualized rate revised up to
2.1% from 1.5% in the advance reading, although this rate remains well below
the final second quarter annualized GDP rate of +3.9%. Analysts chalked up the
revision higher to an expansion of the inventory components of the data, offset
by lower revisions to domestic spending components. Growth in the November Core
PCE reading would have more or less clinched a December rate hike, but
Wednesday's flat/lower core reading is a more ambiguous outcome. The y/y
reading didn't budge from 1.3%, while the m/m figure was 0.046%, barely missing
the rounding bar that would have left it flat. Inflation remains suppressed by
lower energy costs, but the Fed has repeated ad nauseam that it will look past
lower inflation from lower energy prices.
In other US data, the November Markit Manufacturing PMI index slipped to 52.6
from 54.1 in the prior month, putting the index at its lowest level in two
years. According to Markit, domestic demand appears to be holding up well, but
the sluggish global economy and strong dollar continue to act as dampeners on
firms' order book growth. Echoing the slight declines in other US homebuilding
data numbers, October existing home sales declined to 5.36M units from 5.55M
units in September. The October durables were better than expected and the
September figures were revised much higher.
Early on Tuesday, Turkey shot down a Russian SU-24 fighter-bomber on the
Turkey/Syria border. The Turkish side claimed the aircraft entered Turkish
airspace over the town of Yaylidag and said the plane was warned 10 times in
the space of five minutes before it was taken down. Russian President Putin
reacted with very harsh words, calling the move a "stab in the back"
by "terrorist accomplices," with "serious consequences" for
the Russia-Turkey relationship. The incident momentarily sent European equities
lower and helped lift crude prices to two-week highs. Russia has followed up by
moving a cruiser with anti-aircraft capabilities into the theater and
announcing measures to discourage Russian tourism to Turkey. The Kremlin has
also signaled it may take additional economic measures against Turkey.
The minutes from the late-Oct Bank of Japan policy meeting indicated the BoJ
felt comfortable holding off on additional QE. All members agreed wage growth
is somewhat slow, but most also noted the underlying inflation trend is
improving. Members remain on edge about risks of slower growth due to FY17
sales tales tax hike. While the BoJ is not interested in more stimulus, the
government is not holding back. There were press reports that the Abe cabinet
has prepared a new draft plan to deal with low inflation. Tokyo intends to
raise minimum wage by 3% next fiscal year and support capex by rewarding
companies that invest in plants and equipment that improve energy use.
On Friday, the Shanghai Composite plummeted 5.5%, in its biggest decline since
the August stock market tumult. Traders cited the report that Chinese officials
are expanding their crackdown on brokerages including CITIC and Guosen
Securities. US markets were unfazed by the drop in the Shanghai index, ending
holiday shortened session around flat. Brazil shares took a hit this week when
police investigating the ever growing Petrobras kickback scandal announced they
had arrested the head of the ruling party in the Senate, Senator Amaral, as
well as Andre Esteves, the CEO and controlling shareholder of BTG Pactual SA,
Latin America's biggest investment bank.
Activist investors are targeting AIG and Alcoa. Back in late October, Carl
Icahn pushed AIG to break itself up into three companies. This week, he said he
would commence a consent solicitation for shareholders and may seek a board
seat. Icahn disclosed that he has been talking with AIG CEO Peter Hancock,
although he also indicated AIG's CEO was not taking his advice. AIG responded
simply by noting the steps it has taken to streamline the businesses. At Alcoa,
Elliott Management disclosed a 6.4% stake and said it was talking with
management about steps to "maximize shareholder value," which might
include selling its hydropower business, expanding margins, and follow through
on splitting up the business.
After a flurry of press talk last week, Pfizer and Allergan have agreed to
merge in a tax-inversion deal worth up to about $155 billion that will result
in the world's biggest drug maker by sales. Allergan shareholders will be
receiving $363.63 worth of Pfizer stock, or 11.3 shares per share. The new firm
will retain the Pfizer name and Allergan's domicile in Ireland. Pfizer expects
the combined firm to have an adjusted tax rate of 17-18%, lower than its current
25% rate.
