Friday, March 4, 2016

Recession? What Recession? Weekly Market Update: Recession? What Recession?
Fri, 04 Mar 2016 16:04 PM EST

US and European equity markets saw their third straight week of gains as stronger crude prices and the prospect of more easing kept the rebound on track. The ECB has all but guaranteed more easing at its policy meeting on March 10th, and President Draghi reiterated that the ECB has no limits on policy tools that are within its mandate, highlighting the growing downside risks to the euro zone outlook. Russia, Saudi Arabia and an ad-hoc group of other OPEC producers continue to discuss a meeting later this month to finalize plans on freezing crude production at current levels, helping push crude futures close to YTD highs. In China, the PBoC kept the yuan strong and cut the RRR ratio for the first time since 2009. There was a raft of dodgy US economic data, but the very good February jobs report provided a strong counterweight, and by Friday markets were pricing in at least one Fed rate cut this year, as well as a small chance of second rate hike by the fourth quarter. For the week, the DJIA rose 2.2%, the S&P500 gained 2.7%, and the Nasdaq added 2.8%.

US economic data out this week included more subpar manufacturing sector reports (the Feb Chicago PMI), weak January home sales numbers and even a Feb ISM services report that raised questions about the consumer-driven side of the economy, but the strong February US jobs report trumped them all. February non-farm payrolls rose by 242K, the 72nd straight month of uninterrupted job gains, by far the longest streak on record. December and January payrolls were revised higher, putting monthly job gains over the past three months at a very healthy average of 228K. Unemployment remained at 4.9%, equal to the eight-year low seen in January. Somewhat offsetting these very positive components, wages fell by 0.1% versus the 0.5% increase in January, for a 2.2% bump in the annual gain. The Fed's beige book was split, with half the Fed districts reporting economic growth and the other half showing flat to slightly down conditions.

China's PBoC resumed its easing cycle on Monday, cutting the reserve requirement ratio (RRR) by 50 bps, taking the ratio to 17% for the nation's biggest lenders. It was the first cut in the key policy rate since last October, and comes as somewhat of a surprise given that the PBoC had previously said it would rely more on short-term cash injections to maintain liquidity. The PBoC did conduct open-market operations on Monday, however the RRR cut suggests that the short-term liquidity operations have not been as successful as hoped. Note that the announcement came just after the government said 1.8 million workers would be laid off from the steel and coal sectors, in an effort to curb overcapacity, and just ahead of the annual meeting of the National People's Congress, which will discuss the continuing implementation of President Xi's plan for deep structural reforms.

The G20 last weekend met the very low expectations, as leaders agreed yet again that monetary policy was no longer sufficient to address the ills of the world economy and promised to refrain from competitive FX devaluation. China specifically used its role as host of the event to reassure its global partners that it did not intend to further devalue the yuan. The PBoC raised the yuan reference rate to a three-week high by Friday even as they pumped more cash into the domestic economy. After the G20, Chinese officials kept up a steady drumbeat of commentary to the effect that the yuan would remain steady and that another big devaluation was "impossible."

Polling ahead of Britain's June referendum on continued European Union membership appears more or less deadlocked. An ICM poll saw support for and against the EU tied at around 41%, while an ORB poll saw 52% in favor of leaving and 48% saying they would vote to remain in the EU. Prime Minister Cameron began amping up his rhetoric in favor of the "stay" option, highlighting the unknown and possibly very high costs that would come with the choice to leave the EU, just a week after his conservative rival Boris Johnson threw his weight behind the "go" camp. After peaking above 1.4650 at the beginning of February, cable bottomed around 1.3850 on Monday then firmed somewhat, closing out Friday around 1.4250.

The ongoing political and economic crisis in Brazil reached a head on Friday, as police raided the home of Luiz Incio Lula da Silva, the former president who is under investigation in the colossal "Car Wash" graft scheme involving national oil company, Petrobras. Lula was taken into custody for questioning, just a day after reports claimed that Delcdio do Amaral, a senior senator in Lula's Workers' Party, was negotiating a plea deal to testify that Lula was deeply implicated in the scandal. Current President Dilma Rousseff is already facing impeachment proceedings, and it appears that Amaral has the goods on her as well, greatly increasing the risks to her office. Nationwide anti-government protests are scheduled for mid-March, and many analysts suggest the government may not survive for much longer. As the socialist government unravels, markets like what they're seeing: the Bovespa has rallied more than 40% since its January low, adding nearly 18% this week alone. The real has strengthened around 7% on the week, with USD/BRL dropping to around 3.72, its strongest level since last August. Shares of Petrobras rallied ~50% this week.

Crude prices probed YTD highs as futures racked up their third straight weekly gain, with Brent topping $38 and WTI approaching $36. Russia confirmed that the oil production freeze summit will take place later this month, featuring the participation of 15 major OPEC and non-OPEC producers, although parties to the deal were taking pains to reiterate that no production cuts are under discussion - only the production freeze. Markets remained optimistic despite another stunning set of gains in US weekly inventories, with the DoE build about four times the expected amount. Meanwhile, US natural gas futures settled at a 17-year low on Thursday around $1.68 thanks to oversupply and the warm winter in North America.

February auto sales data was relatively strong, providing a counterpoint to the weak US manufacturing theme that continues to obsess US participants. Fiat Chrysler and Ford sales were very strong, although General Motor's headline figure widely missed the mark due to some specific company factors. Ford led the way with a 20.4% gain thanks to an uptick in its fleet business, while sales at Fiat rose 11.8%. GM's sales fell 1.5% due to a decrease in rental sales, although this was largely the result of a planned reduction in rental deliveries.

In M&A news, Intercontinental Exchange said it would compete with Deutsche Boerse to acquire the London Stock Exchange. ICE hasn't given a formal offer to LSE, and no decision has yet been made as to whether to pursue such an offer. Last week, shares of LSE soared 17% after Deutsche Boerse proposed an all-stock deal. Theater chain AMC Entertainment reached a deal to acquire Carmike Cinemas for $30/share in cash, in a total deal valued at $1.1 billion. Honeywell formally abandoned its pursuit of United Technologies, citing the latter's unwillingness to engage in negotiations.