Friday, March 18, 2016

Dovish Fed Ends Dollar Rally, Sends Stocks Higher Weekly Market Update: Dovish Fed Ends Dollar Rally, Sends Stocks Higher
Fri, 18 Mar 2016 16:09 PM EST

This mid-March week was dominated by a string of monetary policy decisions, with the key focus falling squarely on the Federal Reserve. Risk on sentiment was rewarded when the Fed apparently blinked, delivering an even more dovish statement that expected. The Fed decision got some cover from poor retail sales revisions that erased what had been strong sales data in January. US Treasury rates were touching monthly highs heading into FOMC statement after February core inflation ran hotter than expected. The 2-year yield touched 1% for the first time since early Jan before a dovish FOMC statement and press conference sent short rates forcefully lower. The curve steepened pushing the 10-2 Treasury yield spread wider by roughly 5 basis points. For the week, the DJIA gained 1.8%, the S&P500 advanced 1.3%, and the Nasdaq added 1%.

The week started off with a BOJ policy decision. The Japan central bank maintained its rate and quantitative easing targets unchanged, but it downgraded its economic assessment to reflect a slowdown in exports. Elsewhere, the Norway central bank cut its key rate by 25 basis points to 0.50%, as expected, and said it could cut further this year, but is approaching the lower bound. South Africa's SARB raised its rate 25 basis points to 7.00% citing inflation concerns. The BOE, SNB, Banixco (Mexico), and Russia central bank also had meetings this week, leaving their policies unchanged.

The FOMC decision was the most impactful monetary policy announcement of the week, and it also delivered the biggest surprise. As expected, interest rates were left unchanged, but the policy statement was more dovish that expected as the Fed refrained from restoring language about a balanced risk outlook. In addition, the Fed's rate path projections moved much closer to the market outlook, with the Fed's median projections for rate hikes cut in half from 4 to 2 for this year. The US dollar sold off and equities rejoiced with both the Dow and S&P 500 continuing their winning ways with a fifth positive week and erasing all the losses of January and February.

The USD Index hit a 5-month low. The Yen benefited from repatriation flows ahead of Japanese fiscal year-end at the end of March and saw gains throughout the week. As USD/JPY tested below 111.00, speculation reemerged that the BOJ might intervene in FX markets to combat recent yen strength. Meanwhile, several ECB members (Draghi, Praet) noted that the ECB had not run out of ammunition and rates could go lower. The verbal intervention tempered some of the post-FOMC strength seen in the Euro.

Another key story was the rebound in oil. With emerging market central banks broadly remaining accommodative, flows to riskier assets, alongside the dollar decline, benefited the oil rally. Crude gained another dollar this week, and WTI managed to peek above the $40/bbl mark for the first trading day of January. The main driver outside of the weaker Greenback this week was the potential OPEC/non-OPEC production freeze summit. It appears that producers have settled on a meeting on April 17th in Doha. About 20 nations have been invited, and officials said the summit will now take place with or without Iran attending.

Despite the strength in equity markets, the biotech sector was under pressure again this week as Valeant's woes continued. The biotech roll-up reported disappointing Q4 results on Tuesday and cut guidance, admitting that it continues to face challenges. In addition, management said that it would not be able to file its annual report in a timely manner, creating a technical breach of its debt covenants. Creditors were quick to pounce, reportedly demanding higher interest payments to grant Valeant a waiver on debt covenants. By the end of Tuesday, VRX shares had plunged 50% and other firms with a similar model were also under pressure.

In M&A news, Starwood has inspired a bidding war. A consortium led by China's Anbang raised its preliminary offer by another two dollars to $78/share in cash, putting pressure on Marriott to improve its standing offer. Another Chinese firm, Zoomlion, raised its bid for Terex by a dollar to $31/share, tempting Terex to call off its pending merger with Finland's Konecranes. Meanwhile, TransCanada reached an agreement to acquire Columbia Pipeline Group for $13B in cash.