Friday, April 8, 2016

Meandering Markets Await Clearer Signals Weekly Market Update: Meandering Markets Await Clearer Signals
Fri, 08 Apr 2016 16:11 PM EST

US equity markets drifted lower this week in low-volume trading. With little weighty US or global economic data on the calendar, trading sentiment was knocked around by the vagaries of the oil market and the continuing weaker dollar trend. Traders scanned the ECB and Fed minutes in vain for more direction on the institutions' monetary policy views. Interest rates declined globally with US Treasury yields falling to one month lows. Banking stocks continued to face strong headwinds with several managements outlining the difficult environment financial institutions still face. Meanwhile, the US government worked hard to crush several high-profile merger deals. Next week looks pretty light of data as well, although the slow-moving spring quarter earnings season is rapidly approaching. For the week, the S&P500 slipped 1.2%, the DJIA lost 1.2%, and Nasdaq fell 1.3%.

The yen's big move higher - the Japanese currency edged up to 18-month highs against the dollar, with USD/JPY dropping as low as 107.75 - was a big theme this week. The end of the Japanese fiscal year in March brings plenty of yen inflows, as Japan's corporations are required by law to repatriate their overseas profits. However, the Bank of Japan continues to stay away from any big new stimulus programs, the government has refused to consider a 2016/17 extra budget frontloaded with additional stimulus spending, and PM Abe's has made it clear the sales tax will rise to 10% in April 2017 as scheduled, giving traders plenty of reasons to go long yen. Technical considerations played a role, too: the 110 level was a big magnet, as that was the key level breached when the BoJ launched its surprise QE enlargement at the end of October 2014 expanding its asset base to ¥80T. As the USD/JPY breached the 110 level, reports emerged that the BoJ might further expand the asset base at its upcoming April meeting. Government officials repeated all week that they were watching yen strength with concern, but there was no evidence of intervention, especially given Japan is hosting the G7 in May, and Japan has no desire to be seen as an FX manipulator ahead of the meeting given its

The minutes from the March 16th FOMC meeting did little to change the messaged crafted by Chair Yellen in her post-decision press conference or her speech last week: to assure the expansion stays on track, policy will respond to growth threats as much as it does to actual data. The minutes showed several members agreed that hiking rates in April would signal an unjustified sense of urgency, although a couple of hawks had advocated a March hike - in remarks later in the week, Fed Governor George said she voted for a 25 bps hike in March on concerns about creating financial imbalances. Separately, hawk Mester refrained from saying when the Fed should hike next, and also emphasized that the Fed was not behind the curve. Fed fund futures were pricing in less than a 20% chance of a June rate hike as of Friday.

Minutes from the last ECB meeting complicated the policy picture somewhat. The minutes showed the committee did not rule out more rate cuts at the March meeting and judged there was little evidence of unwelcome side effects from negative rates. Recall that during the post-meeting press conference back in March, Mario Draghi stated that he did not anticipate any more rate cuts as the ECB turned to other instruments, which helped fuel the current streak of euro strength. The minutes this week indicated that several council members were willing to consider deeper rate cuts and that future cuts remain on the table. EUR/USD spiked to fresh six-month highs ahead of the release of the minutes, trading up to around 1.4550, but the pair remained rangebound in the 1.1340-1.1420 area this week.

The two-week long slide lower in crude prices bottomed on Monday, with WTI dropping to around $35.50 and Brent to around $37.40. After some uncertainty in recent comments, the Iranians and the Russians both confirmed that Iran would attend the OPEC/non-OPEC production freeze negotiations in Doha on April 17th, although Tehran continues to insist it would only participate in the freeze after its domestic production level rises back to the pre-sanction level of 4.0M bpd. Last week, the Saudis were threatening not to participate in the freeze unless all other producers agreed to the deal. On Friday, the Russians said the deal would likely freeze production at January levels. Separately, weekly inventory reports showed that US crude stocks have started to be drawn down again after nearly two months of big builds. Those drawdowns along with the weaker greenback ushered WTI oil prices back up to just under $40/bbl by Friday afternoon.

Tesla disclosed that it had received 325K Model 3 orders in the first week after the vehicle's debut, indicating to about $14B in future sales. This is nine months ' worth of production under CEO Musk's goal of 500K unit per annum by 2020, and earlier in the week Musk had taken to Twitter to ponder whether he may have been too conservative in his outlook. Some analyst said their estimates were as high as 350K units, and on April 4th Tesla said its first quarter deliveries would only be 14,820 units, versus the 16K guidance it offered back in February. Shares of TSLA gained 10% on the week.

The US Treasury published tough new regulations aimed at tax inversions. The new rules would prevent foreign companies from acquiring multiple US firms over a short period of time, with a new three-year limit on foreign companies bulking up on US assets to avoid ownership requirements for a later inversion deal. Last fall, the Treasury made its first attempt to stop inversions, forbidding them in transactions where continuing ownership of the US parent in the deal is 60-80%. The rules were at least in part implemented to stop the Allergan/Pfizer deal. Just after the first regulations were announced last fall, Pfizer agreed to acquire 59% of Irish firm Allergan in an inversion deal. But Allergan itself was built by serial acquisitions: US firm Actavis bought Irish firm Warner Chilcott in an inversion, then it acquired Forest Labs and finally Allergan, taking the latter's name but remaining in Ireland. Pfizer abandoned the Allergan buy the day after the new rules were announced. There were concerns about Shire's acquisition of Baxalta, and shares of both firms sank on the rule change, although the companies claim the deal is not an inversion.

Separately, the Justice Department sued to stop Halliburton from acquiring rival Baker Hughes, in a deal currently valued around $34 billion that was announced in November 2014 (just as oil prices started to fall). The DoJ said it would not allow deals that enhance shareholder value at expense of competition. The BHI-HAL tie-up would combine two of the world's three leading providers of services to oil and gas companies. The companies were said to have made last-ditch efforts to save the combination, but that the DoJ was uninterested in the various remedies offered.