TradeTheNews.com 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 Jet.com. 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.
