TradeTheNews.com Weekly
Market Update: Central Bankers and Higher Crude Stem the January Sell-Off
Fri, 22 Jan 2016 16:14 PM EST
After three weeks of punishing declines, global markets may have found a
bottom. Traders keyed on what appears to have been Wednesday's important
intraday technical reversal for both stocks and oil prices. On that day trading
volumes surged, negative market internals spiked, the VIX reached levels not
seen since last summer ahead of a 400+ point reversal in the Dow. By Thursday
many suggested sentiment was also improving upon markets hearing the distant
sound of the central bank cavalry riding to the rescue. Mario Draghi promised
the ECB would look at more easing at the next policy meeting, while there were
rumors that the Bank of Japan could launch another helping of QE at the policy
meeting next week. The PBoC was less sanguine, however they promised to expand
use of a new medium-term instrument to provide markets with liquidity, and
separately fixed the yuan reference rate higher for the tenth consecutive
session on Friday, putting the yuan at its strongest rate to the basket since
January 6th. The other big positive catalyst was crude, which found a
short-term bottom below $28. Both WTI and Brent dipped into the $27 handle on
Wednesday upon Feb options expiration, then rallied hard through the close on
Friday. Prices gained more than 20% in 48 hours, with both WTI and Brent
closing out the week above $32. Global elites gathered in Davos, where nearly
every interviewee was asked at least once whether they saw recession in the
offing (most hedged or said not really). In the background, Q4 earnings season
slogged on with managements offering up cautiously optimistic outlooks based on
more of same in terms of tempered economic growth. US stock indices posted
their first weekly gains in a month: after losing over 500 points through
Wednesday morning, the DJIA rallied to end up 0.7% on the week, the Nasdaq
rebounded to post a 2.3% gain, and the S&P added 1.4%.
China's economy slowed in the final quarter of 2015 to +6.8%, the weakest
quarter of growth since the crisis in 2009, as Beijing continues to push its
economic transition to a consumer economy. The full-year 2015 China GDP figure
was +6.9%, the weakest growth rate since 1990. December industrial production
saw its weakest y/y growth in 25 years, while December fixed-asset investment
expanded at the slowest pace since 2000. The anemic slate of economic data
prompted hopes for yet another round of stimulus from the authorities, in the
form of RRR cuts or spending programs. The PBoC said it would begin expanding use
of mid-term lending facilities (MLFs) to add liquidity, and a PBoC economist
commented that the MLF facility could be a substitute for RRR cuts, which
somewhat confused markets.
The ECB took no action at its policy meeting this week, but ECB President Draghi
said the committee would review and possibly reconsider monetary policy at the
next meeting in March, when the latest round of ECB staff forecasts will be
published. He repeated several times that the ECB has not only been highly
successful with its prior unconventional monetary policy actions, but that it
still has plenty of tools left to help it achieve its mandate. Draghi justified
his more dovish stance by warning that conditions have changed since December,
specifically citing the 40% decline in oil prices since that time, an
increasing possible correlation between inflation expectations and lower oil
prices, and the chance that 2016 inflation levels will drop even lower due to
the commodity price implosion. EUR/USD saw lower lows this week, testing below
1.0800, but was still constrained at the upper bound by the 1.0990 level.
The Bank of Japan's upcoming policy meeting is scheduled for next week and
expectations were building for the bank to introduce more QE in light of market
conditions. The yen has strengthened notably since the start of the year, with
USD/JPY dropping from the 120.50 area in late December to as low as 116.00 this
week. Preliminary January manufacturing PMI data dropped to a three-month low,
as the new orders component slowed to a six-month low and inflation-gauging
input prices fell for the first time in over three years. At Davos, BoJ
Governor Kuroda said that deflationary pressures were a real risk, but also
cautioned that he did not believe the global economy was on the brink of a
deflationary wave and highlighted that underlying Japan inflation was still
above 1.0% and that inflation expectations were still well anchored. Kuroda
hinted that the BoJ has room for more QE, if needed, but the bulk of his
comments were dismissive of any need for more stimulus.
In the eye of the storm on Wednesday, Fed fund futures had significantly
repriced the probability of more FOMC rate increases this year. Futures pointed
to less than 1% probability of four Fed rate hikes in 2016, with just a 30%
chance of a March rate hike, compared to 53% a month ago. Recall that the dot
chart released at the December Fed meeting predicted four interest rate hikes
in 2016. Fed fund futures priced a 40% chance of no further rate hikes this
year. By Friday, the futures contracts had eased off those levels. The
benchmark 10-year yield after touching 1.93% recovered back above 2.05% by
weeks end.
While the jobs picture certainly argues in favor of more Fed policy tightening,
the inflation front is much less rosy. After trending downward for more than a
year, two key inflation gauges - the five-year, five-year forward inflation
break-even rate and the yield premiums on regular USTs over TIPS - both tumbled
to their lowest levels since April 2009. In a report out on Wednesday, US CPI
inflation unexpectedly slipped lower m/m in December, after November's flat
reading. Analysts said the softness in the sequential data was mostly due to
lower energy costs. Meanwhile the y/y readings were stable. In the 12 months through
December, core CPI rose 2.1%, the largest gain since 2012, after climbing 2.0%
in November.
At Davos, Saudi Aramco's chairman made extensive comments about the oil market
and Saudi Arabia's role in it. He said the Saudis would be able to withstand low
oil prices for a long time, given they have the lowest cost of production and
the ability to increase production at will. He also said oil prices have
overshot to the downside and will likely rise by the end of the year. Also at
Davos, the head of Russia's Direct Investment Fund said Russia may be ready to
cooperate with OPEC, given how low prices have fallen.
The IMF cut its global growth forecast for the third time this year. Citing
weakness in the developing world, the IMF said the world economy would grow
3.4% in 2016, down from an October forecast of +3.6%. It downgraded the 2016
outlook for developing economies to 4.3% growth from a forecast of 4.5% in
October. The IMF trimmed its forecast for US economic growth to 2.6% this year
from 2.8%, noting the prospect of higher interest rates. It kept its 2016
forecast for China's economy unchanged at 6.3%.
Wall Street earnings reports continued roll in this week. Morgan Stanley
greatly improved its performance in the bank's fourth quarter, roundly beating
both earnings and revenue expectations. Morgan grew both earnings and revenue
on a y/y basis. Bank of America's fourth-quarter results were mixed, with
earnings up nearly 10% y/y, beating expectations, even as revenue slightly
undershot. On the conference call, executives disclosed that 2% of the bank's
overall loans were to the energy industry. Goldman Sachs had a mixed report,
with provisions for its RMBS legal settlement eating approximately 75% of its
quarterly profit, while revenue fell slightly on a y/y basis. Goldman's key
book value per share metric rose 5% y/y.
Three big Dow components held back the index late in the week. IBM reported its
15th straight quarter of contracting revenue, with sales at all three of the
firm's major business lines lower y/y. The firm's FY16 forecast was weaker than
expected. GE's revenue total in its fourth quarter missed analysts'
expectations, although total profit beat and both profit and revenue were up
modestly on a y/y basis. The firm's oil & gas revenue fell 16% y/y, but
most of the other industrial businesses saw good growth. American Express
tanked as investors tore into the firm's FY16 forecast. The new guidance range
beat expectations, but only because it includes an expected $1 billion gain on
the sale of its Costco credit card portfolio, which implies that underlying
growth will be weaker than expected.