TradeTheNews.com Weekly
Market Update: Spring Awakening
Fri, 13 May 2016 16:08 PM EST
Strong jobs and retail sales data out this week appeared to tip the debate
about whether the US economy is getting over the big hiccup seen in the first
quarter. Also, somewhat hawkish commentary by a few moderate FOMC voters drove
a flatter US Treasury yield curve and kept upward pressure on the greenback
into the week's end. Weak Chinese trade data drove big declines on the Shanghai
Composite, however the story did not seem to impact global markets more
broadly. Meanwhile, crude prices steadily advanced back toward $50, where many
commentators expect them to be for the balance of 2016. Corporate bond issuance
picked up momentum and coincided with a slate of US Treasury issuance. The US
3- and 10-year sales were received well by the markets, but Thursday's 30-year
saw demand hampered after a several large corporations sold significant amounts
of longer dated debt earlier in the week. Nevertheless the US 10-year yield
finished the week at roughly 1-month and 1-week lows of 1.70%. Stocks didn't
make much headway as traditional retailers reported a spate of disappointing
earnings, and for the week the DJIA fell 1.2%, the S&P500 lost 0.5%, and
the Nasdaq slipped 0.4%.
Last Friday, the April jobs report raised real fears about a slowdown in the
labor market, however the March JOLTs data out this week lent support to the
thesis that things are more or less healthy. The job openings available in
March surged to their second highest level ever at 5.8 million, while the key
quits rate held steady at 2.1%, just under the decade high of 2.2%. The hiring
rate fell slightly from February but remained strong. Meanwhile, the weekly
jobless claims rose to a 14-month high, after last week's 12-month high,
raising some eyebrows. The April retail sales numbers were much stronger, and
most importantly the control group - used for calculating GDP - surged to +0.9%
to +0.2% m/m.
The US Dollar accelerated higher heading into the week's end, following hawkish
remarks from FOMC voters George and Rosengren, aided and abetted by the better
retail sales data. The dollar index pushed out to around one-month highs just
shy of 95, while EUR/USD dropped sharply on Friday back below 1.1300. Boston
Fed President Rosengren's remarks certainly sounded like an endorsement of more
interest rate hikes, sooner. He said markets were too pessimistic about the
economic and policy outlook, weak Q1 data appeared to be temporary, and early
Q2 data was consistent with inflation closer to 2% target and GDP growth above
1.75%. George, the dissenting voter at the last two FOMC meetings, simply
repeated again that she is in favor of raising rates. The 2-year/10-year UST
yield curve noticeably flattened at week's end as short-term yields saw their
biggest gains in three weeks. Expectations for rate hikes repriced on Friday,
with Fed funds futures calling for a 61% chance of a rate hike by December,
compared to 43% earlier.
China's exports stabilized in April in yuan terms, but saw declines in dollar
terms. The export sector has shown y/y declines in dollar terms for nine of the
last 10 months. Imports fell 11% y/y in dollar terms, while imports extended a
streak of declines to 18 months, down 2% y/y. In yuan terms, the report was
much less bad, with exports up 4% but imports also down sharply. April's
exports follow a March surge in both currencies, which may have been
exaggerated by seasonal effects after the Lunar New Year holiday. The absence
of a sustained trade rebound adds to pressure for more government stimulus to
help boost growth
There are growing fears about rising public bond defaults in China, which may
be causing the nation's bond market to stagnate. An HSBC note out this week
reported that YTD, there have already been 12 public bond defaults involving
more than RMB7.8 billion of principal, exceeding the total amount in the
previous two years. At the same time, a series of credit events among
state-owned enterprises and local government funding vehicles undercut investor
confidence in credits assumed to have government backing. HSBC said that in April
alone, around 130 primary market bond offerings were either postponed or
cancelled, the most on record.
Last weekend, Saudi Arabia's new power player, Deputy Crown Prince Mohammed bin
Salman, reshuffled the Kingdom's government in a continuing bid to consolidate
his growing influence in Riyadh and also diversify the economy away from
reliance on oil alone. Among other moves, he is said to have driven the removal
of long-serving oil minister, Ali al-Naimi, and his replacement with chairman
of Saudi Aramco, Khalid al-Falih. Analysts believe the reshuffle was the next
step in Saudi Arabia's efforts to pressure rival non-OPEC producers (chiefly
Iran). Prince bin Salman has hinted in the past that Saudi's oil output could
easily be accelerated to help gain market share. Recall that the scuttling of
the production freeze deal was widely believed to be bin Salman's decision,
over the objection of al-Naimi.
Crude prices returned to the six-month highs seen in late April, with Brent
touching $48 and WTI briefly hitting $47. The wildfires in Canada's Alberta
province shut in more than 1.0M bpd of crude output, well over a third of the
country's typical daily production, almost all of which is exported to the US.
Relatively smaller production outages across multiple other geographies
received ample press coverage as well. In addition, the weekly DoE inventory
report turned in a surprisingly large drawdown in crude stocks.
Over the weekend, Greece's parliament pushed through yet another package of
reform legislation to secure yet another bailout loan tranche payment, agreeing
to an overhaul of the pension system and higher VAT taxes. Meanwhile, euro zone
officials agreed to ease Athens' debt burden by giving Greece longer grace
periods and bond maturities from 2018, if the country delivers by then on all
reforms agreed under its latest bailout. The Eurogroup will decide on the size
of the loan at its next meeting on May 24th, allowing Greece to make key
repayments in July.
The Brazil Senate voted to proceed with President Rousseff's impeachment trial,
after the Supreme Court rejected challenges to the impeachment process. Vice
President Temer assumed the role of interim president, and wasted no time in
naming a new cabinet, tapping the market-friendly Meirelles as the new finance
minister. Rousseff will be suspended from her position for up to six months as
the trial is conducted in the Senate. For her part, Rousseff said she was
confident she could defeat the charges, though it could be a long fight.
Earnings out of the US retail sector this week showed that the first three
months of the year were very, very tough. The Gap's sales comps sank 7%, versus
expectations for a slight gain, while the company also offered first quarter
guidance that widely missed the mark. The firm cited weaker traffic and higher
inventories for the poor performance. Macy's saw its revenue decline more than
7% y/y, its fifth consecutive quarter of lower revenue, and it also cut its FY
view. Sales comps in the quarter fell 5.6%. Macy's CEO warned that the company
is seeing continued weakness in consumer spending for apparel and related
categories. Kohl's missed top- and bottom-line expectations, on a nearly 4%
decline in comp sales. Executives took pains to emphasize that the sales trend
would surely improve in the second quarter and get even better in the second
half of 2016. JC Penny's quarterly loss was smaller than expected and comps
were negative, however the company optimistically sustained its EPS and SSS
forecasts for the FY, expressing their confidence in trends for the rest of the
year.
In M&A news, Krispy Kreme reached a deal to be taken private by JAB Holding
Company for $21 per share in cash, or a total equity value of approximately
$1.35 billion. Note that JAB acquired Keurig Green Mountain last year and also
has controlling stakes in other coffee companies including Peet's Coffee and
Caribou Coffee.
US regulators stopped another megadeal this week, as a Federal district court
granted the FTC's request for a preliminary injunction to block the Office
Depot/Staples merger. The companies quickly abandoned the deal after the court
action, marking the second time that the two companies tried and failed to
merge in the last two decades. The federal court judge agreed with the FTC's
contention that the merger would reduce competition in the office supply space,
in spite of the rise of new sources of competition online. The FTC made a
convincing case that Amazon was not offering services that would suit large
bulk buyers of office supplies. Shares of the two names had lost 40% a piece
over the last ten months as prospects of the deal close looked weaker and
weaker. Staples lost another 20% this week, and ODP was down 40%.
Shares of Chinese tech names that are seeking to delist from US markets and
relist in China tumbled all week long on reports regulators in Beijing might
get in the way of their plans. The China Securities Regulatory Commission
(CSRC) was said to be mulling limits on the number of reverse mergers from
previously foreign-listed companies, although it was reportedly not considering
an outright ban. Separate reports suggested that Qihoo 360's talks with the
CSRC on its relisting had bogged down, while the buyout group facilitating YY
Inc's delist/relist process was halting its offer due to the uncertainty
surrounding the market. Shares of VNET, DANG, MOMO, YY and QIHU saw 10-30%
losses on the week.
