Friday, April 29, 2016

Spring Cleaning Weekly Market Update: Spring Cleaning
Fri, 29 Apr 2016 16:42 PM EST

The last groans of the dismal first quarter were heard this week, as economic data and corporate earnings showed just how weak things were in the first three months of the year. Meanwhile, both the Fed and Bank of Japan held policy meetings that delivered zero new measures and very little in the way of color on the institutions' views of the malaise. Stocks sank through the week's end, while the dollar softened notably and oil and precious metals soared. However, the prevailing view in some quarters is one of good riddance to bad rubbish, as the decks are cleared for a nice move higher as the cold spring heats up. A hint of things to come were seen in the much improved European first quarter GDP data. US Treasury prices stabilized helping yields back off of recent 5 week highs, largely on the currents coming from the equity selling pressure. For the week, the DJIA lost 1.3%, the S&P500 dropped 1.3%, and the tech laden Nasdaq slumped 2.7%.

Annualized US GDP growth in the first quarter skidded to a two-year low of +0.5%, surprising nobody as Q1 showed seasonal weakness for the third year in a row. Business investment fell sharply, which did surprise many observers. On the positive side, residential investment and personal consumption saw much stronger-than-expected gains. In any case, the weak overall number was widely expected.

The mildly more hawkish notes in the FOMC statement seemed to leave the door open for a rate hike at the June meeting, although the preponderance of its very cautious language largely remained in place. The committee removed from the statement a warning about risks from "global economic and financial developments," saying that it was now monitoring such developments. For the third time in a row, Fed officials refrained from providing guidance on the balance of risks. The statement provided a mixed picture of the economy. It emphasized the improving labor market and noting that "strong job gains" likely herald a further pickup but acknowledged that economic growth "appears to have slowed." Fed Funds futures saw the odds of a June hike fall to 12% following the GDP report from around 21% after the end of the Fed policy meeting the day earlier.

The yen's big move higher in the last week of March and the first week of April saw USD/JPY break below the key level of 110, inspiring talk that either the government or the Bank of Japan would have to do something to bolster the economy and cool off the currency. Neither side has budged this month, with the BoJ resorting to verbal intervention and the government merely hinting that the sales tax might be hiked slightly less than planned (and only then because of the Kumamoto earthquake). The yen had come off its 18-month highs in the middle of April, thanks mostly to rumors that more BoJ easing could not be avoided, with talk of the bank authorizing more asset purchases or even lending to banks at negative rates. The BoJ authorized neither at Thursday's policy meeting and kept its policy stance unchanged. Markets reacted swiftly: the yen jumped and the Nikkei index slumped. By Friday, USD/JPY was at fresh 18-month lows around 107. There was ominous economic data out this week: March Core CPI fell by 0.3% y/y, the biggest drop since the BoJ launched its easing campaign three years ago.

Inaction from both the Fed and the BoJ has reinforced the weaker dollar trend and sent the Dollar Index lower every day this week. By Friday, the index was around 93, the lowest level since last June. Also on Friday, China's PBoC set the yuan at its strongest level since the beginning of April, and the daily fixing moved up by the biggest margin since July 2005. The weaker dollar helped propel commodity prices higher, with crude pressing on to fresh six-month highs. Brent rose to $48 and WTI was above $46. Gold prices rose 4% on the week to fresh 15-month highs, while silver hit 12-month highs. Note that certain industrial metals were hammered by new regulations implemented by the Chinese to curb speculation. Iron ore prices in China fell more than 10% after China's Dalian Commodity Exchange raised trading charges, vowing a clampdown on what it termed "excessive speculation."

Europe saw contrasting, perplexing data reports on Friday. The Eurozone slipped back into deflation in April, with prices dropping 0.2% y/y (core CPI was +0.8% y/y). Germany's EU harmonized CPI figure was -0.1% y/y. Meanwhile, the first reading of Eurozone Q1 GDP was +1.6%, a bit ahead of expectations. Advance GDP readings for Q1 were also very robust in France and Spain. The euro remained strong this week, but did not manage to top the 1.1450 level seen in mid-April.

Nearly 60% of the S&P500 component companies have reported first quarter results as of Friday, and the focus has been on lower profits and slower global growth. Overall earnings for the S&P500 are expected to decline more than 6% y/y in the quarter, and are still expected to decline even when energy companies are excluded from calculations. Notable exemption from this trend with earnings out this week included tech giants Facebook and Amazon, both of which crushed expectations on excellent rates of growth. In addition, consumer goods names Ford and Whirlpool both did strikingly well, even given the broader weakness in the manufacturing space. Apple was a story all its own: Cupertino saw its first q/q decline in revenue since 2003, thanks to lagging iPhone sales in China.

Troubled pharmaceuticals firm Valeant named a new CEO, tapping former Perrigo chief Joseph Papa to replace the embattled J. Michael Pearson. The choice is somewhat odd, given that Papa and Perrigo have recently faced their own challenges since Papa helped fend off a hostile takeover by Mylan last year. At his Senate committee hearing, outgoing CEO Pearson admitted that Valeant had been too aggressive in raising prices on certain drugs. In addition, Valeant filed its long-delayed 10K and replaced most of its board. Shares of PRGO closed out the week down 20% on the week on its CEO departure and on poor preliminary Q1 guidance.

Abbott Laboratories surprised markets by announcing a totally unexpected megadeal to acquire St. Jude Medical for a total of $25 billion, or $85/share in cash and stock. Analysts say the acquisition is very positive, as the deal fills an obvious lack of cardiovascular products like pacemakers and defibrillators in Abbot's lineup. The deal came as Abbott's merger pact with Alere got closer to falling apart. Last month Alere had deferred its annual 10K filing, citing some revenue recognition troubles. There was talk Alere could be facing defaults, and this week it disclosed that Abbott pressed the company to withdraw from its merger deal. For its part, Abbott said it would be perfectly capable of handling both the St. Jude acquisition and the Alere issue without problems. Shares of both ALR and ABT were down about 10% on the week.