TradeTheNews.com Weekly Market Update: Green Shoots or Gangrene?
Thu, 24 Mar 2016 17:05 PM EST
Global equity markets broke a month-long advance this week, as another leg down
in energy prices and further gyrations in emerging markets impeded risk
appetite. Risk was further constrained by the twin Brussels bombings, which
killed scores, wounded hundreds and showed a Europe gravely exposed to Daesh
terrorism. The continuing recovery in crude prices peaked again midweek as both
Brent and WTI bumped up againt $43 or so and then headed lower, dragging down
the energy sector and rekindling fears about bank exposure to bad energy debt.
There were faint green shoots in a few March manufacturing reports, but the
preponderance of economic data showed a global economy mired in slowdown. At
the same time, Fed speakers continued to talk about two or three Fed rate hikes
this year, causing markets to reconsider risk tolerance in the face of global
monetary policy divergence. For the week, the DJIA lost 0.7%, the S&P500
dropped 0.7%, and the Nasdaq slipped 0.5%.
The flash Markit March factory PMI report showed the US manufacturing sector
remains in go-slow mode. The index slightly missed expectations and remained
pretty close to flat, however the new orders component was slightly elevated.
Nevertheless, the Markit manufacturing PMI remained in expansion territory and
greener shoots kept emerging from the regional Fed surveys: the March Richmond
Fed manufacturing survey was very strong, with a big bounce back seen in the
headline figure and the new orders component. This comes after last week's
March Philadelphia Fed outlook index rose to its highest level since last
February on a big surge in new orders and the New York Fed's Empire survey rose
back into positive territory for the first time since last July.
Several Fed officials offered commentary on policy this week, and the hawks and
doves appeared to be in greater agreement about the direction of policy than
one might expect. Bullard dismissed the Fed's dot plot and claimed the
composition of the plot contributed to the sell-off earlier this year, adding
that he had considered dropping out of the exercise. He said the issue with
forward guidance is that markets may take the Fed's projections as a promise.
Harker said he was not a "two-dot member," and claimed there was a
very good case for raising rates more quickly. Harker said he expects at least
three rate hikes this year. The dovish Evans said rates need to start going up
because the economy is getting stronger, and said two rate hikes this year is
not at all unreasonable. Moderate member Lockhart warned there could be another
hike as soon as next month.
Last Friday, the PBoC had tightened the yuan reference rate to its strongest
level since mid-December, at 6.4628, in response to continued dollar selling
the wake of the Fed decision. Over the next four days, it dialed back the yuan
rate to the softer rate seen before the FOMC meeting. The streak of post-Fed
and post-ECB forex gyrations likely dictated the moves. Beijing has pledged to
make monetary policy more flexible this year even as it leans more on increased
fiscal spending and tax cuts to support economic growth and cushion the pain
from structural reforms.
Japan's preliminary March factory PMI fell to its lowest level since early
2013, returning to contraction for the first time in a year. Markit economists
warned there had been more deterioration in manufacturing conditions, citing
the contraction in output and new orders. The disappointing PMI data comes amid
the ongoing dispute about fiscal policy and the question of whether to postpone
a second round of sales tax increases as part of the government's ongoing
economic reform plan. Finance Minister Aso still wants to implement the hike
next spring, and said this week he does not believe the economy needs more
stimulus (in the form of withdrawing the tax hike). Meanwhile, Cabinet
Secretary Suga was less resolute than last week when he ruled out a delay,
stating that the government may in fact postpone the tax hike if overall tax
revenues were to fall further. On Friday, Japanese long rates backed up modestly
after the BOJ changed the composition of upcoming asset purchases to favor
securities with shorter maturities.
Home sales in the US were mixed in February. The annualized rate of new home
sales accelerated from the January reading, while the rate of existing home
sales slowed somewhat m/m. Both figures were up slightly from last year. The
National Association of Realtors (NAR) blamed the lull in existing home sales
on delays in contract signings in January from the East Coast blizzard and the
slump in the stock market. Meanwhile, new home sales were buoyed by big gains
in the West, however the other three regions of the country saw flat to much
lower sales. Affordability and supply continues to be a huge problem.
"Finding the right property at an affordable price is burdening many
potential buyers," said the NAR. Separately, KB Homes disclosed solid
first quarter results, including good gains in net orders and backlogs.
Apple has launched a smaller, cheaper iPhone - called the iPhone SE -
ultimately aimed at emerging markets and China. The iPhone SE - featuring a
smaller 4" screen - is Apple's second attempt to offer an entry-level or
mid-tier device, following the poorly received iPhone 5c, launched in 2013.
Shares of Apple have rallied 10.3% over the last month as investors anticipate
Cupertino has finally found a way to juice its flat lining iPhone sales trends,
although AAPL was flat on the week.
Activist fund Starboard Value has committed itself to replacing the entire
Yahoo board in a fight to control the company. Starboard - with a 1.7% stake in
Yahoo - proposed a slate of candidates includes Jeffrey Smith, its own CEO.
Starboard had previously called into question the leadership of CEO Marissa
Mayer, and analysts believe that by increasing the pressure on Yahoo's board,
Starboard thinks it can finally push the company to sell its core businesses.
In deal news, Marriott raised its offer to acquire Starwood Hotels to
$79.53/share in stock and cash, topping Chinese insurance firm Anbang's offer
of $78/share. The new total for Marriott's offer is valued around $13.6B,
however Marriott's cash component is a mere $21/share, while Anbang's offer is
all cash. UK financial data giant Markit has agreed to combine with its US
rival IHS in a $13 billion all-stock deal, valued around $31.13/share. The
combined company will be headquartered in London and would have had annual
revenue of about $3.3 billion in 2015. Sherwin-Williams reached an agreement to
acquire Valspar for $113/share in cash - a big 41% premium to the prior 30-day
weighted average price - for a total deal value of $11.3B. Shares of Richard
Branson's Virgin America shot up more than 15% on Wednesday after the airline
was said to be reaching out to potential buyers about a sale of part or all of