Friday, December 11, 2015

Global Equities Drown in a Sea of Crude Weekly Market Update: Global Equities Drown in a Sea of Crude
Fri, 11 Dec 2015 16:02 PM EST

OPEC's failure to do anything about the global crude glut drove oil prices to six-year lows this week. With prices falling, equity markets were dragged lower by a hard-hit energy sector. Moreover, the long-prophesied high-yield debt meltdown may be underway, as a notable fund specializing in junk bonds froze investor holdings and said it would wind down, causing a major selloff in HYG. Meanwhile, the FOMC meets next week and Fed fund futures are still predicting am ~80% probability of a small rate increase. Nevertheless, US Treasury markets saw aggressive buying through week's end after digesting a fair amount of new supply. Waning risk appetite pushed the US 30- and 10-year yields back below their 200-day moving averages by Friday. For the week the DJIA lost 3.3%, S&P500 dropped 3.8%, and the Nasdaq fell 4.1%.

WTI crude prices fell nearly 10% this week, dropping below $36, within striking distance of the January 2009 low near $33/bbl. Brent slipped 12% to below $38, even closer to its December 2008 bottom around $37/bbl. The primary catalyst was OPEC's muddled and contentious summit last week, with no action taken to stem the glut. In a report out on Friday, the IEA warned the supply glut would last until late 2016. With oil marking six-year lows, the Canadian Dollar has hit 11-year lows against the greenback, with USD/CAD at 1.3700. The ruble has fallen to 70.4 to the dollar, pips away from the August low of 70.8, with real worries about the Russian economy setting in.

Another big casualty has been shaky US high-yield debt markets. On Thursday evening, Third Avenue Management, a large mutual fund specializing in high-yield bonds, blocked investors from withdrawing funds, citing difficult trading conditions for its securities. The move highlights longstanding fears that too much money has piled into risky junk bonds. Third Avenue manages a total of $8 billion, and the remaining assets in the fund will be put into a liquidating trust and sold off gradually. The iShares HYG high-yield fund dropped 2% on Friday to four-year lows, extending the run lower that began in spring.

The BoE again left interest rates unchanged at 0.5%. The MPC voted 8-1 for no change, predicting that inflation would stay below 1% until the second half of next year. McCafferty was the dissenter to the decision for the fourth time, voting for a quarter-point rate increase. The minutes showed policymakers concentrated on the continuing subdued inflation environment. GPB/USD moved off the 1.5180 area to test the key level of 1.5110 on the announcement, but then rapidly headed back to 1.5180. GBP/USD notched three-week highs above 1.5230 on Friday as the dollar weakened.

The yuan was allowed to weaken to a four-month low this week, as USD/CNY slipped lower to levels last seen during the summer China FX panic. On Thursday, the PBoC set the midpoint rate at 6.4236 per dollar, 0.15% weaker than the previous fix, prompting the currency to open at its lowest level since August's 4% devaluation. Some traders suggested the bank was teeing up another devaluation, however on Friday the PBoC said it would alter its yuan management as part of Beijing's continuing push towards the goal of a free-floating currency. The PBoC said it would move to measure the yuan's value against currency basket rather than a peg to the dollar, for "better exchange rate stability."

Japan disclosed some brighter economic data this week, contrasting with an ugly Chinese trade report. Japan dodged a technical recession as the final Q3 GDP reading was revised up to +0.3% from the -0.2% preliminary showing. Separately, October leading indicator machine orders grew by over 10% y/y to a four-month high. With the somewhat brighter outlook, expectations for another round of BoJ easing were repriced as the Nikkei wrote that support for more measures at the bank was waning. The China November trade balance came in at a four-month low, with the decline in exports bigger than expected at -6.8% v -5.0%e while imports dropped a little less than expected at -8.7% v -11.9%e. The commodity meltdown certainly was unabated this week, however China November iron ore imports rose 22% and copper imports rose 9.5%.

South Africa was plunged into FX purgatory this week by the government's rash response to the ratings agencies. On December 4th, Fitch cut its assessment of South African public debt to just one notch above junk, and Standard & Poor's revised its outlook on SA's BBB- to negative. Both cited concerns about South Africa's slow rate of economic growth and spiraling public debt. Instead of heeding the warning, President Zuma compounded the damage by firing Finance Minister Nene and replacing him with an obscure MP. ZAR has been slipping lower against the dollar all year, but the pace has accelerated rapidly in December, with USD/ZAR moving to 15.80 from 14.00 at the beginning of the month, most of which accrued after Nene's demotion.

Commodity-producers were under pressure this week as many firms struggled to reconcile depressed stock prices with exaggerated dividends. Kinder Morgan shares swooned last week as investors predicted a dividend cut, and on Tuesday management slashed the payout by 76%, an even bigger reduction than many expected. Freeport-McMoRan suspended its dividend, further reduced its oil & gas capex and curtailed its copper mining operations in response to continued declines in commodity prices. The company said it was increasing curtailments in copper production to about 350 million pounds from 250 million. As investors began to question the reliability of dividends even from the stalwart oil majors, Chevron's CEO came out to say maintaining the company's nearly 5% dividend is the number one priority.

Yahoo scrapped its long-planned spinoff of shares in Alibaba after pressure from investors concerned about the tax risks of the transaction. Yahoo will instead explore a plan to spin-off assets and liabilities other than the Alibaba stake. The move comes after Yahoo's board convened last week to consider options for the company's future, including whether to press ahead with the Alibaba divestiture. Recall that activist shareholder Starboard last month called for the company to drop the Alibaba spinoff and instead sell its Web businesses.

DuPont and Dow Chemical agreed to a $130 billion, all-stock merger of equals. The companies took pains to highlight that the merged entity would rapidly be split into three publically traded companies, each of which would aggregate their respective agriculture, materials and specialty products assets. Under the terms of the deal, Dow shareholders will receive a fixed exchange ratio of 1.00 share of DowDuPont for each Dow share, and DuPont shareholders will receive a fixed exchange ratio of 1.282 shares in DowDuPont for each DuPont share, leaving a 50/50 split ownership. Note that Dow will also be consolidating 100% control of its Dow Corning JV with Corning as part of the deal.

In other M&A news, Keurig Green Mountain agreed to be acquired by private equity firm JAB Holding for almost $14 billion. JAB Holding said it offered $92 for each share of Keurig, a whopping 78 percent premium to the stock's prior closing price. Note that Keurig's stock had fallen nearly 61 percent since the beginning of the year, as K-cup sales slumped. CP adjusted its unsolicited offer for Norfolk Southern to $32.86 in cash and 0.451 shares, from $46.72 in cash and 0.348 shares, although this hardly increased the consideration. NSC was unmoved, and said the proposal was still vastly undervalued. Fairchild disclosed that it had received an unsolicited offer valued at $21.70/share, above the $20/share transaction with ON Semiconductor agreed to back in November. Press reports suggested the offer came from China Resources Group.