TradeTheNews.com 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.
