Friday, April 1, 2016

March Came in Like a Bear and Went Out Like a Bull Weekly Market Update: March Came in Like a Bear and Went Out Like a Bull
Fri, 01 Apr 2016 16:07 PM EST

March arrived with panicky market participants griping about imminent recession and ended this week with those fears essentially in the rear-view mirror. The S&P500 delivered a 1.8% gain this week and a 6.8% gain in March, its best monthly advance since the current bull market began seven years ago - leaving it up a mere 1% for all of the first quarter of 2016. US and China manufacturing data has started perking up, the jobs and housing markets remain strong and there are signs that both China and Europe are starting to get a handle on their respective economic problems. Meanwhile, the recovery in crude prices appears to be over for the moment, as WTI and Brent keep failing to gain any purchase above the $40 mark and the global production freeze deal bogs down from the larger Saudi-Iran rivalry. Fed Chair Yellen negated all of last week's hawkish Fed-speak, apparently taking an April rate hike off the table, citing weak inflation even as the US economy delivered its 73rd month of strong job growth. Treasury yields declined to one month lows and Fed fund futures closed out the week projecting just a 30% chance of a rate hike occurring in June. The US Dollar suffered one its worst weeks in months stirring hopes that the weaker currency will lead to an improving Q2 corporate earnings outlook.

In her remarks, Yellen stressed the pace of rate rises would remain very gradual, largely because global developments still pose ongoing risks. She pointed to some signs inflation expectations may be drifting lower and noted that remains a concern for her. The February PCE report arrived the day before her speech, and the core PCE- the Fed's key inflation metric - sank to +0.1% from +0.3% in January, although the y/y metric remained unchanged at 1.7%. The speech took an April rate hike definitively off the table, and other Fed speak this week echoed Yellen's major themes. Fed moderate Lockhart said that even with good data, it's not mandatory that the Fed moves in April, and added that he sees scope for three rate hikes this year. The New York Fed's Dudley said he was hopeful two rate hikes would be possible in 2016. The very chatty Evans said he would like two hikes, but warned that inflation could stall out around 1.8% later this year. All Fed speakers agreed that current risks to the US outlook come from overseas, and reiterated that soft inflation was the fault of lower commodity prices, chiefly oil.

The March US jobs report was a bit stronger than expected, with the 215K gain in payrolls following a revised 245K gain in February. Average hourly earnings increased 0.3% m/m, while the jobless rate crept up to 5% as more people entered the labor force. The labor force participation rate grew for a fourth straight month, rising to 63% from 62.9% in February. Participation had fallen to a 38-year low of 62.4% last September, but has recovered gradually over the last six months. Analysts noted that in the employment sector breakdown, among the best gains were in construction (+37K jobs) while the worst losses were in manufacturing (-29K jobs).

Factory data from the US and China confirmed a marked uptrend for manufacturing in the month of March. The US ISM manufacturing report returned to expansion territory for the first time in five months, while China's official manufacturing PMI reading topped 50 for the first time in eight months. Key new orders components in both reports were even stronger, boding well for next month - the new orders reading in the ISM data rose to its highest level since 2014. Adding to the constructive production outlook, the Chicago March PMI rose a very strong six points to 53.6, with big gains in new orders, employment and production. Elsewhere in Asia, the Japan and South Korea March PMI reports clouded this rosy outlook, with both figures in contraction. The Japan report warned that total incoming work declined at the sharpest rate in nearly two years. In addition, Japan's Tankan large manufacturing index for Q1 hit its lowest level since mid-2013, with the forward-looking index coming in very weak. Major European manufacturing PMIs remained right around 50, where they've been for months.

Recent home sales data has shown that while the recovery in the US market continues apace, affordability and supply continue to give homebuyers headaches. The January S&P/Case-Shiller home price index recapped this point, showing elevated price gains in major US cities. Meanwhile, inventories are still constrained. The 20-city composite Index rose 5.7% in January, roughly twice the rate of inflation, with four to five months of supply in the market. Pending home sales were well ahead of expectations in February, with the index seeing its biggest m/m increase in a year, however it only just more than cancelled out the January drop, which was revised from -2.5% to -3.0%. Separately, homebuilder Lennar reported another strong quarter, beating top- and bottom-line expectations in its first quarter, with double-digit gains in backlog and new orders.

Crude is seeing a second week of losses as hopes slip away for a grand bargain to freeze crude output levels. There were reports earlier this week that Iran would attend the OPEC/non-OPEC production freeze meeting on April 17th, but would not participate in any deal, as Tehran continues to insist it needs to let its production levels return to the pre-sanction level of approx. 4.0 million bpd. On Friday, Iran's arch rival Saudi Arabia said the kingdom would only freeze output if all other major producers do so - including Iran. The warning came during an interview with Crown Prince Mohammed bin Salman, who is emerging as a major Saudi political force. Meanwhile, Iraq's crude production level was at its highest level in four years. After both Brent and WTI peaked around $42 last week, Brent dropped below $39 and WTI sank below $37.

Shares of former hedge fund hotel SunEdison lost more than half their value this week as it emerged the SEC and Department of Justice launched parallel investigations of recent moves by the company. The SEC is looking into whether the company overstated its liquidity position last fall, when the stock was collapsing and management told investors it had over $1.0B in cash. The DoJ is seeking information related to acquisition of Vivint Solar and intercompany transactions with its yieldcos, TerraForm Power and Terraform Global. It's widely known that SUNE was using the two yieldcos as piggy banks to drive its rapid growth, although investors are betting that they may survive the demise of their parent, and shares of TERP are actually up more than 12% on the week.

Apple won its standoff with the US government after the DoJ said it had managed to access the information locked on the San Bernardino terrorists' iPhone. A Federal judge vacated the earlier order demanding that Apple open up the iPhone for FBI investigators, removing for now the implicit threat it would be forced to build "backdoors" into its products. It remains unclear how the phone was accessed, but speculation centers on a third-party use of an experimental technique called NAND flash mirroring.

Tesla unveiled its much-anticipated Model 3 electric car, its least-expensive vehicle to date. The Model 3's $35,000 base sticker price and decent range should expand the reach of Tesla considerably, and play a central role in helping the company meet CEO Musk's long-term objective of producing 500,000 vehicles a year. Within a day of the launch, Musk tweeted that nearly 200,000 vehicles had been pre-ordered. The first deliveries of the new mass market vehicle are scheduled to start in late 2017.

In M&A news, Foxconn finally reached a deal to discount its original acquisition offer for fallen Japanese electronics giant Sharp. Foxconn (formally named Hon Hai Precision Industry) will pay about $3.5 billion for a two-thirds stake, cutting its initial offer by nearly $900 million following the emergence of previously undisclosed liabilities at Sharp. The deal marks the largest acquisition ever by a foreign company in Japan's insular tech industry. Anbang's dramatic challenge to Marriott's standing deal to acquire Starwood fell apart in spectacular fashion. Two weeks ago, Anbang topped Marriott's cash-and-stock bid with an all-cash offer of $76, then was bid up to $82.75. However, Anbang never made its original unsolicited proposal binding and failed to adequately demonstrate there was sufficient financing in place to back up the deal. Anbang did not give Starwood the reason for dropping its offer, but Chinese financial magazine Caixin reported earlier this month that China's insurance regulator would likely reject the bid since it would put Anbang's offshore assets above a 15% threshold.