TradeTheNews.com Weekly
Market Update: Fed Cautious, Japan Less Than Zero
Fri, 29 Jan 2016 16:19 PM EST
Steadying crude prices and another bout of central bank cajoling helped global
equity markets stabilize this week. The Bank of Japan surprised markets by
putting interest rates into negative territory for the first time ever, joining
the ECB and various other European central banks. Voting 5-4 in favor of the
measure, the BOJ announced that it will charge a rate of -0.1% for excess
reserves parked at the bank by financial institutions, and implied that lower
oil prices made its decision necessary. At the scheduled meeting on Wednesday,
the US Federal Reserve left the door open to a March rate increase despite
acknowledging that "economic growth slowed" since its last meeting in
December. Meanwhile, the PBoC pumped cash into the Chinese economy and
continued its streak of very gradually strengthening the yuan exchange rate.
Stocks continued to be to be very volatile, and by Friday the DJIA posted its
eighth straight day with a triple digit move. For the week, the DJIA gained
2.3%, the S&P rose 1.7%, and the Nasdaq added 0.5%.
Global interest rates dipped on the news the BOJ was going negative. The 2-year
US Treasury yield dropped to a 3-month low while German short rates forged
further into negative territory. Fed fund futures found buyers after the FOMC
statement on Wednesday and remained bid through Friday, with many acknowledging
it will be even harder for the Fed to gradually take rates higher if major
Central Banks around the world keep their foot on the stimulus pedal. The
Dollar rallied 2% against the Yen and 1% against both the Euro and Pound on
Friday further complicating factors.
The FOMC offered more cautious language in its statement, warning that economic
growth slowed late last year, after previously describing the expansion of
economic activity as moderate. Further, the statement abandoned its balanced
outlook language ("the committee sees the risks to the outlook for both
economic activity and the labor market as balanced") and said inflation
would "remain low in the near term." On the positive side, the Fed
noted further improvement in labor market conditions. Analysts said the changes
reflected a more cautious outlook, but hardly ruled out more rate hikes. Friday
afternoon Dallas Fed President Kaplan clarified that the message from FOMC
statement was that more time is needed to assess global situation. He said the
committee has good reason to be patient on rate decisions, and that the number
of rate hikes this year is not locked in.
Heading into Friday's BoJ decision, expectations had been piling up for Kuroda
and company to respond to softer economic data. The final straw were the lower
inflation rates seen in the Japan and Tokyo January CPI prints - particularly
in the forward-looking capital region - along with bigger than expected
declines in household spending and industrial output. Echoing Mario Draghi's
famous phrase, BoJ Chief Kuroda said the bank was prepared to do "whatever
it takes" to achieve its 2% inflation target, and that the bank would go
even deeper into negative territory if needed. In addition, the BoJ cut its
FY16/17 CPI projection to 0.8% from 1.4% prior but maintained its FY17/18
forecast at 1.8%, noting that the assumptions were based on oil prices rising
to over $40/bbl by 2018.
The PBoC used liquidity injections ahead of the lunar New Year holiday to add
the most funds to the Chinese financial system in three years to help stem the
seasonal cash crunch. The bank auctioned a total of 590 yuan or nearly $90
billion in reverse repos in two auctions. The PBoC has signaled its preferences
for such lending and liquidity operations in place of RRR cuts, although
officials also said this week that RRR cuts can still be used, if needed.
Meanwhile, as of Friday the PBoC has strengthened the yuan midpoint for 15
consecutive sessions. Analysts suggested that the BoJ move would put heavy
pressure on the Chinese to resume devaluation of the yuan.
Russia and OPEC began the painful process of admitting that oil prices have
sank too far and that something must be done to put a floor under the market.
There were reports from mid-week that OPEC was considering a meeting with major
non-OPEC producers to discuss the market and possibly attempt to get all
parties to agree to equal, coordinated production cuts. One report suggested
the Saudis wanted everybody to cut 5% of production. OPEC officials downplayed
the reports, but did say the door was open to cooperation. Iran could dampen
the chances of a broad producer agreement, as Tehran appears focused on
restoring its oil industry to pre-sanction production levels. The reports
helped WTI test above $34 on Thursday and Friday, while Brent managed to test
above $35/bbl.
Another January regional manufacturing report surprised to the upside, offering
a glimmer of hope for the battered US manufacturing sector. Earlier in month,
the New York Fed's January Empire survey hit its lowest level since the depths
of the recession in early 2009, while the Philly Fed manufacturing index
improved significantly on a m/m basis, but remained in negative territory. On
Friday, the Chicago PMI saw its biggest m/m rebound in decades, rising back
into expansion territory at 55.6 from a six-year low of 42.9 in December. The
new orders component of the barometer jumped to the highest level in a year,
while production also surged. The December durables report was much less
positive, with the headline figure down 5.1% - the biggest monthly drop since
mid-2014 - following a 0.5% decline in November. Orders for nondefense capital
goods (ex-aircraft) - a key proxy for business investment - plummeted 4.3%.
Analysts suggest that the headline loss was mostly due to big declines in the
very volatile aircraft orders category, while the nondefense capital goods slip
was largely concentrated in the oil and gas sector.
Among the most notable stories out of earnings season was the extreme
volatility hitting elite tech stocks. Shares of Amazon rose 9% ahead of its
report on Thursday afternoon, then plunged 13% after market as profits widely
missed expectations (nearly every other metric telegraphed excellent and
sustained growth in Amazon's various businesses). There was no run up ahead of
Apple's results, as most observers expected the company to offer disappointing
iPhone sales, although the reaction to modest miss (74.8M v 76Me) was
compounded by the firm's typically conservative forward revenue guidance.
Shares of Apple were down around 8.3% on the week by Thursday afternoon. On the
positive side, Facebook gained 15% to a new all-time high on big double-digit
gains in daily and monthly active users, and a 57% y/y gain in ad revenue.
Microsoft was up 5% on modest outperformance in its second quarter, even as net
income and revenue slipped lower y/y.
Johnson Controls agreed to combine with Tyco, in a deal that appears to be
chiefly engineered as a tax inversion to move JCI to Ireland and lower its
corporate tax rate. Shareholders of Johnson Controls will own about 56% of the
combined company and Tyco holders will own 44%. After a tangled, months-long,
three-way merger drama, Nexstar has secured a deal to acquire Media General for
more than $2.1 billion. Meredith Corporation bowed out from its own attempt to
combine with Media General, in exchange for a $60 million breakup fee and a first
look at some of the divestitures that may be required to get Nexstar's Media
General deal done. Media General agreed to be acquired for $10.55 a share in
cash and 0.1249 of a share of Nexstar common stock.
