Friday, May 13, 2016

Spring Awakening 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.