TradeTheNews.com 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.