Friday, November 13, 2015

Weekly Market Update Weekly Market Update: Autumn Rally Vanishes
Fri, 13 Nov 2015 16:16 PM EST

US equities broke a six-week winning streak as global economic weakness finally caught up with the autumn rally. After last Friday's big October US jobs report, the reality of Fed rate hikes in December is starting to sink in, but at the same time, the US economic data out this week suggested that the US is hardly a bastion of strength even compared to the anemic global economy. Chinese October economic data was looking pretty poor, and a raft of European preliminary third-quarter GDP numbers were flat or up tenths of a percent. Commodity prices remained under pressure, with markets watching WTI crude move ever closer to $40/bbl. For the week, the DJIA fell 3.7%, the S&P500 lost 3.6% and the Nasdaq swooned 4.3%.

Press reports out this week indicated that the ECB Council was coming to a consensus that interest rates should be cut deeper into negative territory to support the flagging European recovery. The thinking appears to be that a dominant faction on the council wants to see a steeper cut to the deposit rate than current expectations for a ten basis point reduction. Expectations were high for President Draghi's speech on Thursday, however Super Mario merely reiterated his standing positions that QE will run beyond Sept 2016, if needed, and that the ECB is not short of instruments to achieve price stability. Most of Europe reported anemic preliminary third-quarter GDP numbers on Friday, further highlighting the dim prospects for the continent and handing the ECB doves the ammunition they were looking for. EUR/USD was mostly constrained within the 1.0700-1.0800 range for the week, retesting April lows.

The September JOLTS report gives the Fed even more evidence the US economy at or very near to full employment. The JOLTS survey beat expectations, rising to 5.53M and moving it back toward the record high of 5.735M in July. Analysts note that the quits rate has been stalled at 1.9% for the last six surveys, since the April report, arguing the reluctance of workers to quit and seek other (presumably better) jobs shows the labor market is still not entirely healed. Meanwhile, the weekly jobless claims report showed initial claims steady at recent 15-year lows.

October economic data out of Beijing further cemented the belief that the PBoC and the Chinese State Council would be forced to open the door to even more policy easing. China's October trade balance saw the highest surplus on record since 1995, however both exports and imports saw steep declines: Exports fell nearly 7%, the fourth month of decline, while imports fell an eye watering -19%. October CPI slowed to a six-month low of 1.3%. October industrial output slowed to a 7-month low, missing expectations, while urban asset investment hit new multi-year low. Meanwhile, China Securities regulator CSRC provided some stimulus of its own for Chinese equities, saying it was confident in its ability to reopen the China IPO market by the end of 2015 after a four-month suspension due to stability in financial markets.

Crude futures ended the week not far from their late August lows after an eight-session meltdown. WTI cratered came within pennies of $40 and Brent dipped to $44.50. The weekly inventory reports turned in another round of huge builds. Both Russia and Saudi Arabia reiterated their long-standing opposition to cutting production in order to support prices, strongly suggesting that chances of any sort of deal to trim production at the upcoming OPEC meeting is dead. In its monthly report, the IEA forecasted a 2016 slowdown in global demand. However, the strengthening USD and poor economic data reports out of China and Europe are likely the biggest factors behind crude's dramatic retest of its lows.

Alibaba provided 24 hours of running commentary on its big 'Singles Day' sales event, although investors were not impressed. Jack Ma shared that the total value of goods sold at the event was $14.3B, a 60% increase over the year ago total. Ma claimed the positive numbers were not just a good indicator for Alibaba, but also for China's shift to consumer-driven economy. Shares of BABA lost about 10% on the week, mostly reflecting the weaker data out of Beijing. Meanwhile, Amazon continued to notch all-time highs around $675, driven higher by positive analyst commentary.

Three major US retailers suffered double-digit percentage declines this week after reporting third-quarter results. The Gap lost over 10% on the week after warning investors in a preliminary report that it would miss expectations for the quarter on -3% comps. Macys shares cratered after it missed widely on revenue and cut its FY15, on -3.6% same store sales. In addition, Macys disclosed it would not pursue a REIT transaction to extract value from its real estate holdings, citing the many costs associated with the structure. Nordstrom lost nearly 17% on Friday after missing top- and bottom-line expectations and also cutting its FY15 guidance. JC Penny and Kohl's both beat expectations and turned in positive sales comps in the quarter, however shares of both firms have been dragged much lower by their competitors' failures.

Tech was not immune to earnings weakness either. Cisco reported quarterly results that were better than expected but shares sold off on weak guidance.

Homebuilders DR Horton and Beazer Homes reported strong fourth-quarter results. DR Horton's profits rose nearly 45% y/y and revenue gained 27% y/y, although the firm only just met expectations. Beazer's y/y gains in profits and revenue were considerably less, but still pretty positive. However, Beazer's new orders rate flat-lined in the quarter, while DR Horton continues to see double-digit gains.

In M&A news, AB InBev has formally launched its $100 billion-plus offer for SABMiller and agreed to sell the latter's stake in MillerCoors to help win regulatory approval. The deal would be one of the largest mergers in history, worth about £70 billion or $106 billion. Mylan failed in its bid to acquire Perrigo, falling short of the 50% threshold in its unsolicited tender offer. Troubled natural gas producer Apache Corp received and rejected an unsolicited takeover approach from Anadarko. Press reports also said that Syngenta was back on the block, having received and rejected a preliminary offer from ChemChina.