Friday, March 11, 2016

From Beijing to Frankfurt Weekly Market Update: From Beijing to Frankfurt
Fri, 11 Mar 2016 16:37 PM EST

China and the ECB set the tone for global markets this week. Last weekend, the Chinese leadership disclosed their economic projections for 2016 at the National People's Congress (NPC), unveiling a GDP target range of 6.5-7.0%, as well as a higher fiscal deficit level. China left its CPI target at +3%, and cut its fixed asset investment growth to 10.5% from 15% prior. The changes were largely in line with expectations, although enthusiasm was tempered by the very weak February China trade report out later in the week. On Thursday, the ECB launched another round of monetary policy stimulus, cutting all three of its key policy rates and adding to its monthly QE bond buying scheme. Mario Draghi warned markets that there would not be much more easing on tap from the ECB, while simultaneously claiming that the ECB was not out of ammo. Thursday was the seventh anniversary of the current bull market, as measured from the Monday following the S&P500's ominous bottom at 666 on Friday, March 6th 2009. US markets were flattish and devoid of much major news (beyond the continuing political circus of the presidential nominating contest) until Friday, when stocks surged higher. For the week, the DJIA added 1.2%, the S&P500 gained 1.1%, and the Nasdaq rose 0.7%.

Markets eyed the February China trade report with concern. China's trade balance sank to a 10-month low in yuan terms and an 11-month low in dollar terms, while yuan exports fell 20.6% y/y, their biggest annualized decline since May 2009. Chinese exports have now fallen for eight months in a row, while imports have contracted for 16 straight months. Shipments to the US, Europe and Japan were all down about 20% y/y, racking up bigger declines than high-single/low-double digit slippage seen last month. The data also explain why last weekend Premier Li decided to skip 2016 projections for the trade component of the economy. After the trade numbers, HSBC suggested that recent hopes for a global rebound need to be tempered, as the figures clearly show the downturn in global demand is not getting any better.

In its decision on Thursday, the ECB cut all three of its key rates, and expanded the QE bond buying program by €20B to €80B a month. In something of a surprise move the central bank also said that non-bank investment-grade corporate bonds will now qualify for the buying program, vastly expanding the universe of debt the ECB can choose from. Fears about the perilous state of some banks remain a big problem for the euro zone recovery. While bonds issued by banks still don't qualify for ECB buying, falling yields on other corporate debt due to ECB buying will likely inspire investors to turn to bank debt for yield. The ECB also eased bank funding costs by unveiling a new four-year TLTRO loan program, which could carry interest rates as low as the deposit rate (now cut to -0.4%). In the press conference, President Draghi suggested that there would be no further easing (unless things got much worse), which somewhat dampened the immediate response to the decisions. Draghi also took pains to reiterate that the ECB is by no means out of tools or out of ammo. Buyers snapped up Greek and Portuguese government bonds after the announcement, while most other sovereigns sold off, sending yields higher.

The final reading of the fourth quarter GDP report confirmed Japan's economy has dipped into contraction for the second time in three quarters. The final reading was a bit less bad than the preliminary data, thanks to slightly better corporate capex spending. There was more talk that the government would again push back the second round of sales tax increase from the current April 2017 target date, with a key cabinet meeting scheduled for March 16th.

Commodity prices see-sawed through the week, following the ups and downs of the Chinese economy. Chinese iron ore futures gained 19% on Monday, to multi-month highs, topping an eight week rally, after Beijing set its 2016 GDP target range, then reversed around half this rally on Wednesday after the brutal February trade report - but then reversed higher through week's end. Other major industrial commodities followed a similar trajectory. After following the run-up in commodity prices over recent weeks, mining stocks saw steep losses mid-week, although many of the global mining majors closed out the week flat, with the exception of Vale, which is down 13% thanks in part to the chaos devouring the Brazilian political leadership. Goldman Sachs published a note on Wednesday arguing that deflation, divergence and de-leveraging would reapply downward pressure on commodity prices in the near term.

The rally in crude oil prices slowed but did not stop, as WTI tested YTD highs just shy of $39 and Brent equaled November highs above $40. Maneuvering ahead of a potential oil production freeze summit continued. There had been talk that OPEC and some non-OPEC nations would meet on March 20th in Moscow to seal the deal, but officials said the inability to get Iran on board meant the meeting would most likely take place in April. Sources say Iran is demanding to be allowed to freeze production at its pre-sanctions production level of 4.0M bpd, rather than current levels, which were just over 2.9M bpd in January. The Kuwait Oil Minister said they would only join the freeze if "all major producers" signed on, and threatened to sell "every barrel Kuwait produces" if there is no deal.

Global banking giants Deutsche Bank and Citigroup both made cautious comments at industry conferences about the business environment for banks in the first quarter. Citigroup's CFO warned that revenue from equity and fixed-income trading would fall 15% y/y in the first quarter, while investment banking revenue would fall 25% y/y. Deutsche Bank's CEO said the seasonally strong first quarter might turn out to be challenging for the sector overall, given the heightened volatility in global markets.

United Continental CEO Oscar Munoz said he would return to work just two months after heart transplant, and was welcomed back by a big push by two funds to take control of the board. Holders PAR Capital (3.8% stake) and Altimeter (3.1% stake) said they would launch their own slate of six board members and nominate former Continental CEO Gordon Bethune as chairman, claiming the current board is not holding management accountable. United said they had been engaged in talks with the two firms, and also said they were disappointed the firms could not reach a deal with management.

There was talk that BASF was mulling a rival bid for DuPont, which is in a pending deal with Dow Chemical. According to reports, BASF had contacted DuPont last year, before announcing a $130 billion merger agreement with Dow. Deutsche Boerse is expected to formally announce a merger agreement with London Stock Exchange next week. TransCanda disclosed that it was discussing a "potential transaction" with an unnamed third party, following press reports that a $10B merger with Columbia Pipeline Group was under consideration.