TradeTheNews.com 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.