Friday, August 12, 2016

Risk-On Rules Despite Doubtful Data Weekly Market Update: Risk-On Rules Despite Doubtful Data
Fri, 12 Aug 2016 16:03 PM EST

The DJIA and the S&P500 both notched fresh all-time highs this week and the Nasdaq came very close to record levels as markets kept melting up in the August heat. Crude prices saw their second week of gains off the late July low, providing an assist to higher US equity valuations, while the dollar is gradually softening. Trading volumes were about 20% below average. In the US, decent retail sector earnings were seen, with the quarterly earnings season coming to a close. Economic data was less than stellar, with the July retail sales report flat after three months of solid gains. Both the July PPI report and the import prices data showed inflation losing steam again. The focus in both Japan and China was on the possibility of fresh central bank action to help prop up growth, while in the UK, the Bank of England had trouble finding enough bonds to purchase under its restarted QE program. For the week, the DJIA gained 0.2%, the S&P500 edged up less than 0.1% and the Nasdaq added 0.2%.

The bounce back in crude prices continued this week, with WTI reaching its 200-day moving average at around $44 and Brent back to $47/bbl. Further inventory builds in weekly crude stocks reports undercut prices midweek, but that impact was more than offset after OPEC confirmed that its member would hold an informal meeting in Algiers on the sidelines of an energy forum on Sept 26-28, consolidating talk that Russia, Saudi Arabia and Iran might be able to set aside their differences and put in place some sort of production ceiling.

Economic data out of China further called into question the ability of Beijing to meet even the +6.5% low end of its 2016 growth target. July industrial production and retail sales growth decelerated, while new bank loans fell significantly in July from the prior month and widely missed expectations. Pressure is building on the PBoC to further ease policy, but the central bank has stalled and simply repeated its standing promise to keep policy slightly loose to meet growth targets. Once again, repeated reports made it clear that very high debt levels across the economy and murky bank balance sheets are making policy-makers very nervous about asset bubbles. With that in mind, regulators this week ordered a large-scale review of the nation's banking system, including inspections of deposits, outstanding loans, interbank business and bonds.

Last month, the Bank of Japan launched a comprehensive review of its policies in the era of Abenomics. Reports circulating this week suggest a preliminary outline of the review has identified sharp declines in oil prices, a prolonged hit to growth from the 2014 sales tax hike and the nation's inability to shake off its deflationary mindset as the main obstacles to achieving its 2% inflation target. Analysts were quick to point out the BoJ is only blaming external factors for disappointing inflation gains, and appears to have avoided a frank reckoning with the implications of its own policy decisions. In any case, the BoJ is expected to announce a big new easing plan next month to complement the government's latest stimulus package. Markets expect the bank to change the parameters of the inflation target, cut rates further and possibly expand asset purchases.

In an ominous sign for ambitious quantitative easing programs across the globe, the Bank of England's restart of QE bond purchases ran into trouble on its second day, as it failed to find enough sellers of bonds. The first auction on Monday went off without a hitch, but on Tuesday the bank fell £52 million short of its target to buy £1.17 billion in long-dated government debt. The BoE issued a statement asserting that would be able to make up the shortfall later this year, but with lower and lower yields forcing funds and other investors to hold more and more bonds to maintain returns, it appears that the bank has a real problem on its hands. In the wake of the failed BOE operation, the 10-year gilt yield touched a record low of 0.55%, while the bund yield dove to -0.16%, within range of the all-time low of -0.20% seen in early July. Separately, BoE hawk McCafferty acknowledged that further easing will likely be necessary to further cushion the shock of the Brexit vote on the UK economy.

On Thursday, the Reserve Bank of New Zealand (RBNZ) met expectations and cut rates to new record low of 2.00%. This is the bank's sixth policy easing since 2015, and analysts expect the RBNZ to cut at least one or two more times, bringing the rate to 1.50%. The policy statement added a focus on house price inflation becoming "more broad-based across the regions, adding to concerns about financial stability." As for headline inflation, the statement foresees growth resuming in Q4. The RBNZ specifically stated that "further policy easing will be required" to get inflation to the middle of its target range.

Bank of Korea remained at 1.25% for the second straight month after a surprise rate cut earlier this summer, though expectations of more easing down the line have been sustained after BoK Governor Lee acknowledged the continuing strength of the currency. Also note that South Korea's credit rating was increased to AA from AA- by Standard & Poor's, which cited the nation's steady economic performance, sound fiscal position and flexible fiscal and monetary policies.

Shares of Delta Airlines fell as much as 4% from last Friday's close after a major system-wide network outage massively impacted its flights worldwide. The computer problem was caused by a power outage at its headquarters in Atlanta. The airline cancelled nearly 2,000 flights Monday to Wednesday, and there were further technical issues even after the systems were brought back online, which slowed down the recovery process.

The judge overseeing the review of the Aetna/Humana merger said the trial would begin on November 7th, favoring requests from the Aetna/Humana team. The DOJ had moved for the trial to be held in 2017. This comes just a week after the court agreed to separate consideration of the Aetna/Humana and Anthem/Cigna mergers into two separate trials. The judge in the Anthem/Cigna case said that trial would start by late November, but that she would not likely rule until early next year.

After a week of rumors, Walmart confirmed it reached a deal to acquire online retailer Walmart will pay $3 billion in cash plus about $300 million of Walmart shares for the site. The two operations will maintain separate branding for now, and the deal is expected to greatly boost Walmart's attempts to compete with Amazon. Walmart has generated about $14 billion in annual e-commerce sales, compared with Amazon's annual run rate at over $100 billion.