TradeTheNews.com Weekly
Market Update: Markets Reprice Fed Policy Forecasts
Fri, 05 Feb 2016 16:09 PM EST
After two weeks of moves sideways or higher, most global equity markets resumed
the downtrend seen in early January. The big exception was the suspiciously
calm Shanghai Composite, which eked out a modest gain ahead of China's Lunar
New Year holiday week and was much less volatile than in recent weeks. With
central bank largess pacifying most of Europe and Asia, concern about the US
played a central role. The dollar saw its biggest weekly decline against the
index since 2009, while US treasuries rallied and the 10-year UST yield sank as
low as 1.790% on Wednesday, its lowest level since last February and within
half a percentage point of the record low of 1.380% seen in 2012. Analysts
reoriented their forecasts on Fed policy moves, with many suggesting only one
or two rate hikes may be possible this year. Lower interest rates slammed US
banks, as shares of a raft of major US financials hit 52-week lows. Commodity
prices broadly lifted outside of energy, on the outlook for lower rates
allowing the beaten down global materials stocks to enjoy a modest rebound.
Gold moved back above the 200-day moving average for the first time since
November while the mining stocks saw big outperformance. Weak earnings results
from many oil and tech names provided no relief and for the week the DJIA lost
1.6%, the S&P fell 1.3%, and the Nasdaq plunged 5.4%.
Markets recalibrated their outlook for Fed monetary policy this week, helping
to weaken the greenback. In a note published on Tuesday, Goldman Sachs pushed
its forecast for the next Fed interest rate hike out to June from March, and
lowered its view for the number of increases this year to three from four. On
Wednesday, New York Fed Governor Dudley acknowledged that conditions were worse
now than they were in December when the FOMC delivered its first rate hike, but
also stated the FOMC was not ready to draw very many conclusions about policy
right now. Dudley's cautious comments about the strong dollar also helped
momentum. The closely-watched dollar index fell more than 3% on the week and
gave up all its gains since late October. EUR/USD climbed more than three big
figures on the week - rising from 1.0850 to around 1.1200 - putting the dollar
at its weakest level against the euro since last fall, when the ECB began
hinting about additional QE measures and tanked the single currency.
Key US January data raised tough questions about the state of the domestic
economy. The ISM manufacturing PMI remained in contraction territory for the
third month in row, while the employment component dropped to its lowest level
since June 2009 (45.9 vs 48.0). Services PMIs deteriorated, with the Markit
reading dropping to its lowest point in the series in 27 months and the ISM
data at its weakest since March 2014. The January US jobs report was a mixed
bag: the nonfarm figure was +151K, well below expectations and the weakest
total since the +149K gain in September, while the December nonfarm figure was
revised down by 10% to 262K. On the other hand, unemployment declined to 4.9%,
pushing the economy even closer to full employment. Hourly earnings were
materially higher, giving the Fed some of the wage inflation it has been
looking for.
Global interest rates descended after the Bank of Japan's move to negative
interest rates late last week. Two-year yields fell to -0.5% in Germany and
-0.2% in Japan, where the 10-year yield touched 0.025%. The sugar high felt by
the yen wore off quickly, as USD/JPY dropped back to the 116-118 area it had
been occupying in the weeks leading up to the BoJ decision, off the 121.50
area. BoJ Governor Kuroda spoke extensively about last week's decision, stating
that just because negative rates were adopted it does not mean the bank is out
of ammunition to expand asset buying. Kuroda said he is still concerned that
inflation expectations will weaken in medium term, but for now saw the economy
recovering moderately. He reiterated the BoJ is prepared to push further into
negative rates, if necessary.
Crude prices were volatile this week, and despite the snapback on dollar weakness
remained below last week's highs. Coming into the week, prices dipped on the
weak China manufacturing numbers and a round of denials that an emergency OPEC
meeting would be taking place. WTI sank around 11% to below $29.50 and Brent
dropped 10% to $32.30 on Monday and Tuesday as hopes for coordinated production
cuts were crushed. OPEC and Russia January production reports showed modest
growth in output, further pressuring prices. Russia pumped the equivalent of
18.9M bpd, +1.5% y/y, a post-Soviet record. The plummeting dollar revived
prices briefly, but both contracts were well off their highs as the week drew
to a close, with Brent around $34/bbland WTI below $31/bbl.
After the market volatility last August and this January, China's FX reserve levels
have become a point of concern for broader markets. The December data showed
the biggest monthly decline on record in Chinese reserves. For 2015 overall,
reserved declined $513B, the biggest annual drop ever. The January report drops
over the weekend, and expectations are for another record drop by more than
$100 billion, to a total of $3.2 trillion. While this number is almost
unimaginably huge, some analysts suggested that markets would start to worry if
the total dropped to $2.8 billion or less, as the PBoC could be forced to let
the yuan slide lower with dramatic consequences. Needless to say, the softer
dollar gave the Chinese breathing room in their struggle to manage the yuan
this week.
The BoE's Monetary Policy Committee returned to unanimity for the first time
since last July, voting 9-0 to keep interest rates on hold at record lows.
McCafferty, the MPC's only real hawk, switched his vote to the majority and
conceded to the data, noting that the pick-up in wage growth has been more
muted than expected. And while the committee also cut its economic growth
outlook over global growth concerns, it also stated that a rate hike would be
more likely than not over the forecast period. At his press conference,
Governor Carney said the committee did not discuss negative interest rates and
reiterated that the whole MPC believes the next rate move likely higher, not
lower. Cable leaped to one-month highs after the decision, testing briefly
above 1.4650 before dropping to 1.4470 on Friday.
The Q4 earnings season is in full bloom but results have not been a boon for
the equity markets. Results in the tech sector included some notable
disappointments. GoPro sales bombed during the holiday quarter and guidance was
even worse as management said they would need the next quarter to clear out
excess inventory. Executives promised a simplified product line and a focus on
developing better software would improve the user experience and future
results. Renewing a commitment to long term thinking, they also said they would
no longer give quarterly guidance. Yahoo reported another lackluster quarter,
and CEO Meyer announced her latest underwhelming turnaround plan. She confirmed
reports that the board would review alternatives for the core internet
business, but gave every indication that she is not in favor of the idea. On
Friday, shares of LinkedIn traded down 40% after earnings and very weak
guidance caused analysts reconsider their valuation of the stock.
Among the most notable earnings out this week were results from the global oil
majors. BP's fourth-quarter earnings plunged 91% y/y, with its key
"underlying replacement cost profit" metric falling to $196 million
from $2.2 billion. For 2015, BP saw an annual loss of $5.2 billion compared
with a profit of $8.1 billion a year earlier, worse than the $4.9 billion loss
in 2010, when BP was battered with write-downs and charges related to the Gulf
oil spill. Exxon's quarterly results were better than expected, although
profits fell more than 50% y/y and revenue was down sharply. ConocoPhillips
bent under balance sheet pressure, slashing its dividend by 66% after its net
losses steepened dramatically on a y/y basis. Royal Dutch Shell saw its profits
cut in half y/y, while revenue fell slightly less than 50%, although its preliminary
report two weeks ago prepared markets for the slump. Norway's Statoil saw
profits shrink 44% y/y.
In deal news, Abbott agreed to pay $56/share in cash to acquire
over-the-counter testing kit firm, Alere. The offer represented a huge premium
of more than 50% over Alere's prior closing stock price. The total deal is
valued around $5.8 billion. Just two weeks after News Corp quashed rumors it
was pursuing Twitter, new reports circulated that private equity firms were
working on a deal to take Twitter private. Six months after Syngenta said no to
a $47 billion takeover attempt from Monsanto, the Swiss ag firm has said yes to
a $43 billion offer from state-owned China National Chemical Corporation. The
transaction would be the largest acquisition of a foreign company by a Chinese
business and the latest in a string of deals by the company, known as
ChemChina.
