TradeTheNews.com Weekly
Market Update: Risk Assets Test Key Levels as Global Risks Wane
Fri, 27 May 2016 16:03 PM EST
The S&P500 notched its second consecutive week of gains neared the key 2100
area, where broader equity rallies have stalled again and again over the last
15 months. Most global equity markets in Europe and Asia also saw modest gains.
While equities ground higher, crude prices briefly tested above $50 for the
first time since last fall. May corporate bond issuance continued on at a
historic pace while US Treasury supply found buyers eager to take advantage the
recent declines in prices. The Fed campaign to redirect the markets' interest
rate policy expectations was capped by remarks from Chair Yellen on Friday. The
G7 produced another tepid statement and plenty of hot rumors of conflict
between the US and Japan on clashing visions of how to cope with the global
economic slowdown. The Europeans reached yet another deal to keep Greece afloat
on borrowed money, while in the UK polling numbers suggested the "remain"
camp was gaining ground with only a month to go to the referendum. With some of
those global risks starting to fade, equities rebounded and for the week the
DJIA gained 2.1%, the S&P500 added 2.3%, and the Nasdaq rose 3.4%.
The barrage of Fed speak that drove last week's repricing of interest rate
expectations hardly let up this week. On Sunday, the Boston Fed's Rosengren (a
voter) said that most of the conditions for more rate hikes that were laid out
in the FOMC minutes seem to be on the verge of broadly being met. On Monday,
the San Francisco Fed's Williams said it would be a good idea to raise rates
with inflation below target, due to the lag in policy impact, and warned that
the Fed sets policy based on the direction inflation is headed, not where it is
now. Philly Fed President Harker said rates need to keep rising as inflation
picks up. The ever-chatty hawk Bullard said a rate hike in June or July was not
set in stone. Powell said the economy is on track to meet the Fed's employment
and inflation mandates, with tentative signs that wages are firming. Chair
Yellen capped things off on Friday, saying that she expects data to keep
improving and if that bears out it will be appropriate to raise rates in coming
months.
The second reading of US Q1 GDP was revised a bit higher, to +0.8% from +0.5%
in the advance reading. Consumer spending was unchanged at +1.9% in the first
quarter. New home construction surged to +17.1% from +14.8% in the advance
estimate, the biggest gain in nearly four years. The April new home sales data
confirmed that housing market strength has been sustained at the beginning of
Q2. The annualized rate of new home sales surged in April, rising to 619K
units, up nearly 17% y/y, way ahead of expectations. That's the highest
annualized rate of new home sales since January 2008. With supply tight, the
median price for a new home increased 9.7% y/y to a record $321,100. US
manufacturing data remained poor: the May preliminary Markit factory PMI index
sank to its lowest level since late 2009, and the negative reading in the May
Richmond Fed manufacturing index echoed a similar result in the May Empire
manufacturing survey out last week. Both saw new orders crater, moving from
fairly decent growth in April to big declines in May. The April core capital
goods orders component of the durable goods report fell 0.8%, the fifth month
of declines in the last six months.
For years, the biannual G7 meetings have produced tepid headlines and dull
communiques, in which global leaders agree to continue agreeing on broad, vague
goals. The most recent edition of the G7 in Tokyo was a different story, as the
leaders of the developed world clashed over the right policies to support
flagging global growth and forestall all-out FX war. The communique was as anodyne
as usual, but in the background US and Japanese officials exchanged sharp
rhetoric over FX policies. Japanese officials reportedly made strong appeals
for organized exchange rate intervention, but the rest of the group, led by the
US, rebuffed the appeals. The Japanese also pushed for their plan to commit G7
members to expanding fiscal spending to blunt the slowdown, warning that the
world was potentially at the edge of an economic crisis, but this also appears
to have been rejected by the group. With no coordinated G7 plan in place for FX
or growth, many analysts now expect another round of Japanese stimulus, and
possibly some hint that the BoJ could look at "helicopter money"
policies at the June meeting.
For months, Japan PM Abe has been saying that the 2017 sales tax increase would
only be delayed (again) under the threat of a Lehman-like crisis. As G7 leaders
gathered in Tokyo, Abe gave a speech in which he warned leaders the global
economy was possibly heading towards another Lehman-like crisis, citing the 55%
decline in commodity prices since mid-2014. This prompted many analysts to
conclude the widely-anticipated delay of the tax hike was imminent. Local
Japanese press sources suggested the delay could be as long as two years, with
a formal announcement as soon as next week. Separately, the Japan April
inflation report out this week underlined the failure of Abenomics and the
BoJ's negative rates: CPI was in contraction for the second straight month
(-0.3%) and the Tokyo CPI figure (-0.5% y/y) saw the fourth month of declines
and marked a three-year low. Analysts anticipate the dire inflation data to
produce GDP contraction in Q2. This further underlines the possibility of more
action from the BoJ in June. The softer yen trend seen in the first three weeks
of May hit pause this week, as USD/JPY had trouble maintaining momentum above
110.
There seemed to be a shift in polling on EU Brexit this week, favoring the
"remain" camp. On Monday, an ORB/Daily Telegraph survey of
"definite voters" showed 55% of respondents in favor of staying in EU
and only 42% in favor of leaving. Later in the week, an Ashcroft poll showed
65% of respondents in favor of remaining in the EU and a mere 35% for leaving.
Note that "undecided" respondents remain in the double digits in all
recent polls. The change in tone comes as the government and the Conservative
party ramped up their campaign to emphasize the extreme costs that would
accompany Brexit: up to 800K job losses, as much as an 18% decline in property
prices and an overall price tag of up to £200 billion. Cable again tested YTD
highs this week as the pound softened, although the pair did not maintain a
foothold above 1.4700.
Greece and its creditors reached a deal that could be a major step on the road
to solving the stricken nation's debt crisis. Representatives from Greece, the
IMF and the Eurogroup agreed to preliminary measures to restructure Greek debt
when the country's bailout deal concludes in 2018. Most importantly, the
proposals include reducing the exposure of the IMF by buying out up to €14.6
billion loans. The deal also includes the possibility of the euro zone handing
over €10.3 billion of rescue loans to keep Greece solvent this summer.
Hewlett Packard continues to slim down and adapt to the post-PC world and zero
in on its most profitable segments. Hewlett Packard Enterprise will spin off
its enterprise-services division to Computer Sciences Corp. in an all-stock
deal valued at $8.5 billion. The deal gets HPE out of the market for
information technology outsourcing, which helps customers manage and upgrade
their systems, leaving it to concentrate on selling hardware that covers
servers, storage and networking.
German agricultural and pharma giant Bayer AG offered to acquire Monsanto for
$122/share in cash, in a total deal valued around $62 billion. Monsanto called
the deal inadequate but left the door open for negotiations with Bayer. The
very controversial move comes just three weeks after the board named Werner
Baumann Bayer's new CEO, and was condemned by a major shareholder as
"arrogant empire-building" when news of the proposal emerged last
week.
Shares of Tribune Publishing tanked after the company rejected a revised,
$15/share offer from Gannett. Tribune's board rejected the proposal but did
invite Gannett to agree to a mutual non-disclosure agreement under which both
parties could engage in due diligence and discussions to work out a more
acceptable deal, while Gannett said it was thinking hard about dropping its
offer.