Barron's Saturday summary: Positive on JCP, WMT, MDT, CHKP/FTNT/PANW
Cover story: Profile of AQR Capital Management, a distinctive investment manager with $141B in assets that seeks to translate academic insights about finance and the marketssuch as the appeal of value and momentum investing into winning quantitative strategies for institutional and retail buyers; Nearly all the firms liquid-alt mutual funds are in the black since late July, including the $11B AQMIX.
Tech Trader: The traditional SIM card used in phones and other devices may soon be replaced by an embedded version called an eSIM, which can be re-programmed, allowing users to easily switch among carriers; manufacturers include Gemalto and Giesecke & Devrient.
Trader: Jeffrey Kleintop, chief global investment strategist at SCHW, says the economic data might not be enough to influence Fed chair Janet Yellen or change the central banks recent signals that rates might be temporarily on hold; Cautious on LVS, IP, WDC, AES, EMR: With utility and consumer stocks growing more expensive as investors seek safety, these high-yielding stocks may offer a cheaper approach to defense; Positive JCP: In a contrarian stance, Bernie McGinn of McGinn Investment Management likes the retailer, which is turning around under chief Marvin Ellison and regaining market share.
Interview: Doug Ramsey, chief investment officer of Leuthold Group, says the odds of a recession during the next 12 months are about 40%, much higher than the consensus view (picks: ACN, RE, MA, TRV, AMGN, UNH, CAH, CVS, NOC, DAL, AAL).
Features:
1) Positive on WMT: Retailers muscular efforts to reignite growth could bear fruit in the next two years, rescuing the stock from the bargain bin; company is increasing pay, enhancing the customer experience, and bolstering its e-commerce side;
2) Positive on MDT: Medical device maker carries the statistical traits of a safe-haven stock, but with better growth potential and a better valuation, and shares could rise 20% during the next year;
3) Positive on CHKP, FTNT, PANW: The recent pullback in cybersecurity stocks is a good opportunity for investors to get in the door at three companies with solid long-term outlooks.
Small Caps: Positive on ATRO: Shares of aerospace-parts maker are down for a number of reasons, including the delay of a major order from one of its largest customers, but the steep drop is a buying opportunity.
Follow-Up: Cautious on SO, ED, DUK, AEP, D, PCG, NEE, EIX, XLU: Utility shares are upthe sector has been the second-best-performing in the S&P 500 this yearand are no longer a bargain, though bulls say they offer nice yields at a time of ultralow interest rates.
European Trader: Amid uncertainty about the U.K.s continuing membership in the European Union, British markets are likely to remain choppy for several months, but there are still opportunities for investors (Positive on UL, ARMH).
Asian Trader: Positive on LG Household Healthcare: Korean company is the rising star in the thriving Chinese skin-care market, which is set to defy anything but the most severe economic slowdown.
Emerging Markets: A number of prominent investment managers suggest buying emerging market debt despite some concerns, with countries such as Mexico and Indonesia offering bargains.
Commodities: The sharp price swings buffeting the oil market are likely to continue until excessive supply eases in the second half of the year.
Streetwise: Shares of banks are cheap because of their exposure to falling energy companies and other concerns, but they arent a bargain; investors should instead seek bank bonds and preferred stocks that pay large dividends (Positive on PFF).-
Friday, February 26, 2016
Oil Prices and Policy Stimulus Hopes Elevate Markets
TradeTheNews.com Weekly
Market Update: Oil Prices and Policy Stimulus Hopes Elevate Markets
Fri, 26 Feb 2016 16:13 PM EST
Higher oil prices, soothing central bank/G20 commentary and better US economic data all helped European and US equities climb higher this week. On Friday, the S&P500 tested above the key 1950 level that has repeatedly provided strong resistance over the last several weeks as global markets looked to put the rough start to 2016 in the rear view mirror. Treasury demand remained noticeably firm into month end, especially in light of the improving risk appetite by investors and a string of stronger than expected US data later in the week. Sovereign bond prices did slip on Friday, but have still largely consolidated the safe haven bids seen here in early 2016, keeping the US 10-year around 1.75%. All three of the major indexes closed about 1.5% higher for the week.
Data out this week painted a somewhat confusing picture of the real condition of the US economy. The February preliminary Markit factory PMI reading told us what we already knew: US manufacturing faces very tough sledding. The survey sank to 51.0, its lowest reading since late 2012. But it was Markit's February preliminary services PMI that really freaked people out: the index sank into contraction at 49.8, and Markit Chief Economist Chris Williamson warned the survey data show a significant risk of the US economy falling into contraction in the first quarter. February consumer confidence fell to the lowest level in seven months, with notable declines in the present situation and future expectations components.
On the more positive side, the preliminary January durable goods orders came in at +4.9%, the strongest gain in nearly a year, more than reversing the -4.6% plunge seen in December. The revisions to fourth quarter GDP were a mixed bag, with the headline figure better but spending a bit lower. The second reading of Q4 US GDP defied expectations to the upside, rising to +1.0% from the +0.7% advance figure. Most of the revision higher was attributed to the volatile inventories and trade components. The January personal consumption measure remained very healthy at +2.0%, and personal income accelerated +0.5% from the flat December reading. Core PCE - the Fed's preferred ruler for measuring inflation - was surprisingly strong in January, rising to +1.7% from +1.5% in December, the fastest m/m acceleration seen since late 2012.
January inflation data out of the euro zone suggested the disinflation predicted by ECB Vice President Constancio last week was at hand. The total euro zone measure was a mere +0.3% y/y, while preliminary February readings from Spain, France and four major German states saw negative y/y readings. The readings further strengthened the case for more easing from the ECB next month, even as markets express more and more uneasiness with negative rate policies. The strengthening dollar seen over the prior two weeks continued this week, with the relatively strong US GDP and PCE data on Friday pushing EUR/USD back below 1.0950 and back into the range seen in December and January.
Expectations have been building for weeks if not months that Beijing would be forced to add additional stimulus of some kind in order to deal with the continuing Chinese slowdown. Guessing has focused on RRR cuts, more medium-term liquidity injections and possible fiscal policy moves. There were reports that PBoC staff were recommending the government increase the fiscal deficit to 4%/GDP from the 3%/GDP currently targeted in 2016, although finance ministry officials tempered these hopes. Until Thursday, the Shanghai Composite had remained more or less calm since late January. Tightening liquidity conditions, driven by a spike in short-term money market rates - the overnight repurchase rate spiked by 16 basis points to 2.12% - sparked a 6.4% decline in Shanghai. Interestingly, the sell-off did not travel to Europe and the US, with equities in both regions up sharply on Thursday.
Saudi Arabia, Russia and other major OPEC producers worked hard to consolidate support for the proposed oil production freeze agreement announced last week. Iraq remains non-committal, while Iran ramped up its negative rhetoric. Iran Oil Min Zanganeh called the plan "a joke," while various OPEC officials conceded that Iran might need individual attention in negotiations for a freeze. Parties to the agreement will meet in mid-March to negotiate a formal deal. On Friday, Brent tested as high as $37 and WTI briefly ticked above $34.50 for three-week highs, but by and large prices were well contained within the ranges seen through the month of February.
Cable made fresh seven-year lows every day this week, closing out Friday around 1.3850, forced lower by nervousness about the upcoming referendum on the UK's continued membership in the EU. Political jawboning and constant polling kept the subject of Brexit in headlines, but the biggest development was London Mayor and Conservative Party stalwart Boris Johnson backing the anti-EU camp. Citigroup suggested that Brexit risk rises to 30-40% from 20-30% prior with Johnson's endorsement. Polls were very tight: a BMD/Standard poll on the EU Referendum showed 44% of respondents opting to stay in the EU, while 41% wanted to leave, while a YouGov poll saw 37% in favor of staying versus 38% for Brexit.
Earnings season is winding down with reports from the largest US retailers. Decent results from Macys, Kohls, Best Buy and JC Penny helped boost the shares of a broad spectrum of retail names. Macy's topped its recent guidance for the quarter and offered FY guidance that was slightly ahead of expectations. Comps were down more than 4%, but again this slightly beat consensus views. Kohls raised its dividend and managed to deliver (barely) positive sales comps. Best Buy's comps were negative, although it also launched a big new buyback and raised its dividend. Lowe's and Home Depot both had positive quarters, aided by continuing strength in the housing market. Shares of Hewlett-Packard sold off hard after the firm disclosed ugly revenue declines with its first-quarter results.
After years of negotiations, fallen Japanese titan Sharp reached a deal to sell itself to Chinese firm Foxconn (formally known as Hon Hai Precision Industry) for around $6 billion. But then in a very rapid reversal, shares of Sharp gave up the 15% or so they had gained over the last month on talk the deal was finally closing when Foxconn said it would postpone the arrangement until it had clarified some "new material information" from Sharp, reportedly sizable undisclosed liabilities. Honeywell and United Technologies confirmed press reports that the two companies had discussed a potential merger deal but talks stalled given very significant regulatory hurdles and considerable customer concerns. UTX's CEO went as far as to appear on CNBC to say that a merger with Honeywell just "ain't going to happen." Honeywell confirmed that it had offered $108/shr in cash and stock, and would continue to pursue a combination. London Stock and Deutsche Boerse said they were holding talks about a potential merger of equals, which would create a combined group worth nearly $28 billion.
Fri, 26 Feb 2016 16:13 PM EST
Higher oil prices, soothing central bank/G20 commentary and better US economic data all helped European and US equities climb higher this week. On Friday, the S&P500 tested above the key 1950 level that has repeatedly provided strong resistance over the last several weeks as global markets looked to put the rough start to 2016 in the rear view mirror. Treasury demand remained noticeably firm into month end, especially in light of the improving risk appetite by investors and a string of stronger than expected US data later in the week. Sovereign bond prices did slip on Friday, but have still largely consolidated the safe haven bids seen here in early 2016, keeping the US 10-year around 1.75%. All three of the major indexes closed about 1.5% higher for the week.
Data out this week painted a somewhat confusing picture of the real condition of the US economy. The February preliminary Markit factory PMI reading told us what we already knew: US manufacturing faces very tough sledding. The survey sank to 51.0, its lowest reading since late 2012. But it was Markit's February preliminary services PMI that really freaked people out: the index sank into contraction at 49.8, and Markit Chief Economist Chris Williamson warned the survey data show a significant risk of the US economy falling into contraction in the first quarter. February consumer confidence fell to the lowest level in seven months, with notable declines in the present situation and future expectations components.
On the more positive side, the preliminary January durable goods orders came in at +4.9%, the strongest gain in nearly a year, more than reversing the -4.6% plunge seen in December. The revisions to fourth quarter GDP were a mixed bag, with the headline figure better but spending a bit lower. The second reading of Q4 US GDP defied expectations to the upside, rising to +1.0% from the +0.7% advance figure. Most of the revision higher was attributed to the volatile inventories and trade components. The January personal consumption measure remained very healthy at +2.0%, and personal income accelerated +0.5% from the flat December reading. Core PCE - the Fed's preferred ruler for measuring inflation - was surprisingly strong in January, rising to +1.7% from +1.5% in December, the fastest m/m acceleration seen since late 2012.
January inflation data out of the euro zone suggested the disinflation predicted by ECB Vice President Constancio last week was at hand. The total euro zone measure was a mere +0.3% y/y, while preliminary February readings from Spain, France and four major German states saw negative y/y readings. The readings further strengthened the case for more easing from the ECB next month, even as markets express more and more uneasiness with negative rate policies. The strengthening dollar seen over the prior two weeks continued this week, with the relatively strong US GDP and PCE data on Friday pushing EUR/USD back below 1.0950 and back into the range seen in December and January.
Expectations have been building for weeks if not months that Beijing would be forced to add additional stimulus of some kind in order to deal with the continuing Chinese slowdown. Guessing has focused on RRR cuts, more medium-term liquidity injections and possible fiscal policy moves. There were reports that PBoC staff were recommending the government increase the fiscal deficit to 4%/GDP from the 3%/GDP currently targeted in 2016, although finance ministry officials tempered these hopes. Until Thursday, the Shanghai Composite had remained more or less calm since late January. Tightening liquidity conditions, driven by a spike in short-term money market rates - the overnight repurchase rate spiked by 16 basis points to 2.12% - sparked a 6.4% decline in Shanghai. Interestingly, the sell-off did not travel to Europe and the US, with equities in both regions up sharply on Thursday.
Saudi Arabia, Russia and other major OPEC producers worked hard to consolidate support for the proposed oil production freeze agreement announced last week. Iraq remains non-committal, while Iran ramped up its negative rhetoric. Iran Oil Min Zanganeh called the plan "a joke," while various OPEC officials conceded that Iran might need individual attention in negotiations for a freeze. Parties to the agreement will meet in mid-March to negotiate a formal deal. On Friday, Brent tested as high as $37 and WTI briefly ticked above $34.50 for three-week highs, but by and large prices were well contained within the ranges seen through the month of February.
Cable made fresh seven-year lows every day this week, closing out Friday around 1.3850, forced lower by nervousness about the upcoming referendum on the UK's continued membership in the EU. Political jawboning and constant polling kept the subject of Brexit in headlines, but the biggest development was London Mayor and Conservative Party stalwart Boris Johnson backing the anti-EU camp. Citigroup suggested that Brexit risk rises to 30-40% from 20-30% prior with Johnson's endorsement. Polls were very tight: a BMD/Standard poll on the EU Referendum showed 44% of respondents opting to stay in the EU, while 41% wanted to leave, while a YouGov poll saw 37% in favor of staying versus 38% for Brexit.
Earnings season is winding down with reports from the largest US retailers. Decent results from Macys, Kohls, Best Buy and JC Penny helped boost the shares of a broad spectrum of retail names. Macy's topped its recent guidance for the quarter and offered FY guidance that was slightly ahead of expectations. Comps were down more than 4%, but again this slightly beat consensus views. Kohls raised its dividend and managed to deliver (barely) positive sales comps. Best Buy's comps were negative, although it also launched a big new buyback and raised its dividend. Lowe's and Home Depot both had positive quarters, aided by continuing strength in the housing market. Shares of Hewlett-Packard sold off hard after the firm disclosed ugly revenue declines with its first-quarter results.
After years of negotiations, fallen Japanese titan Sharp reached a deal to sell itself to Chinese firm Foxconn (formally known as Hon Hai Precision Industry) for around $6 billion. But then in a very rapid reversal, shares of Sharp gave up the 15% or so they had gained over the last month on talk the deal was finally closing when Foxconn said it would postpone the arrangement until it had clarified some "new material information" from Sharp, reportedly sizable undisclosed liabilities. Honeywell and United Technologies confirmed press reports that the two companies had discussed a potential merger deal but talks stalled given very significant regulatory hurdles and considerable customer concerns. UTX's CEO went as far as to appear on CNBC to say that a merger with Honeywell just "ain't going to happen." Honeywell confirmed that it had offered $108/shr in cash and stock, and would continue to pursue a combination. London Stock and Deutsche Boerse said they were holding talks about a potential merger of equals, which would create a combined group worth nearly $28 billion.
Sunday, February 21, 2016
Barron's Saturday summary: Positive on LGF, SYF, PDCO
Cover story: The economy is in a growth pause, not the pause before the onset of recession; Favorable fundamentals at this stage in the expansion should dominate, with economic growth running at an annual rate of 2.8% through the first half and 3.2% by the second half.
Tech Trader: Cable companies are worried about a potential FCC plan to unlock cable boxes, allowing viewers to use devices from other companies to watch TV; Comcast has worked hard to improve its set-top box, and it thinks few of its customers would use third-party devices.
Trader: Bernie McGinn of McGinn Investment Management says that for the stock market to regain its equipoise, energy and financial stocks need to show strength; Positive on LGF: Many of the studios problems appear to be discounted in the stock price, and shares could rise 50% during the next 24 months just by returning to form; Ned Davis Research says investors should seek out GARP, or stocks offering growth at a reasonable price; among companies meeting the criteria are MOH, WEX, SOHU, AMG, OMF, AAPL, GILD, ESRX, HCA, VMW.
Interview: Donn Vickrey and Herb Greenberg of Pacific Square Research make a bearish case for BABA, Home Capital Group, and SIG.
Profile: Neil Hennessy and Brian Peery, portfolio managers, Hennessy Cornerstone Mid Cap 30, discuss their focus on mid-caps that are large enough to weather economic downturns and small enough to be strategically nimble; firm has outpaced 86% of its peers during the past decade (top 10 holdings: CASY, W, SBGI, SNX, HA, INGR, ATO, NVR, OMI, IPG).
Features:
1) Positive on SYF: Company has gained 12 points of market share since 2004; shares are down 17% in the past year, but that appears overdone, and they could rise 40% as steady loan growth boosts the P/E multiple;
2) Austin, Texas-based Hoisington Investment Management has ridden the secular decline in government bond rates and the handsome concomitant rise in bond prices to annual compounded returns of 7.9%;
3) Positive on LafargeHolcim: Stock price is down amid disappointing earnings and worries about the global economy, but the selloff seems overdone, and shares are likely to rise this year as new opportunities extend the brand.
Small Caps: Positive on PDCO: Global distributor of dental and veterinary products has simplified operations, and shares are inexpensive for a market leader.
Follow Up: The year is only two months old, and high volatility and a punishing stock market correction have already taken a painful toll on the most recent predictions made by strategists in Barrons annual market outlook; Positive on AMD: Chip designer should have better days ahead as it launches new high-end desktop chips and moves into the server sector.
European Trader: Positive on Exor: Italian financial holding company whose assets including FCAU, RACE, and CNHIis a good way to by those companies at a discount.
Asian Trader: As Chinas bad debt reaches levels not seen in a decade, investors are pondering a crucial question: Do Chinas commercial banks have enough of a capital cushion to absorb all those delinquent loans?
Emerging Markets: Katie Koch of Goldman Sachs Asset Management says Indias real GDP growth could move from about 7.5% today to 10% within the next several years, but the benefit of the uptick wont be reflected in funds that buy GEMAX.
Commodities: Gold has defied naysayers with a sharp rally, but the jury is still out on whether the gains will last.
Cover story: The economy is in a growth pause, not the pause before the onset of recession; Favorable fundamentals at this stage in the expansion should dominate, with economic growth running at an annual rate of 2.8% through the first half and 3.2% by the second half.
Tech Trader: Cable companies are worried about a potential FCC plan to unlock cable boxes, allowing viewers to use devices from other companies to watch TV; Comcast has worked hard to improve its set-top box, and it thinks few of its customers would use third-party devices.
Trader: Bernie McGinn of McGinn Investment Management says that for the stock market to regain its equipoise, energy and financial stocks need to show strength; Positive on LGF: Many of the studios problems appear to be discounted in the stock price, and shares could rise 50% during the next 24 months just by returning to form; Ned Davis Research says investors should seek out GARP, or stocks offering growth at a reasonable price; among companies meeting the criteria are MOH, WEX, SOHU, AMG, OMF, AAPL, GILD, ESRX, HCA, VMW.
Interview: Donn Vickrey and Herb Greenberg of Pacific Square Research make a bearish case for BABA, Home Capital Group, and SIG.
Profile: Neil Hennessy and Brian Peery, portfolio managers, Hennessy Cornerstone Mid Cap 30, discuss their focus on mid-caps that are large enough to weather economic downturns and small enough to be strategically nimble; firm has outpaced 86% of its peers during the past decade (top 10 holdings: CASY, W, SBGI, SNX, HA, INGR, ATO, NVR, OMI, IPG).
Features:
1) Positive on SYF: Company has gained 12 points of market share since 2004; shares are down 17% in the past year, but that appears overdone, and they could rise 40% as steady loan growth boosts the P/E multiple;
2) Austin, Texas-based Hoisington Investment Management has ridden the secular decline in government bond rates and the handsome concomitant rise in bond prices to annual compounded returns of 7.9%;
3) Positive on LafargeHolcim: Stock price is down amid disappointing earnings and worries about the global economy, but the selloff seems overdone, and shares are likely to rise this year as new opportunities extend the brand.
Small Caps: Positive on PDCO: Global distributor of dental and veterinary products has simplified operations, and shares are inexpensive for a market leader.
Follow Up: The year is only two months old, and high volatility and a punishing stock market correction have already taken a painful toll on the most recent predictions made by strategists in Barrons annual market outlook; Positive on AMD: Chip designer should have better days ahead as it launches new high-end desktop chips and moves into the server sector.
European Trader: Positive on Exor: Italian financial holding company whose assets including FCAU, RACE, and CNHIis a good way to by those companies at a discount.
Asian Trader: As Chinas bad debt reaches levels not seen in a decade, investors are pondering a crucial question: Do Chinas commercial banks have enough of a capital cushion to absorb all those delinquent loans?
Emerging Markets: Katie Koch of Goldman Sachs Asset Management says Indias real GDP growth could move from about 7.5% today to 10% within the next several years, but the benefit of the uptick wont be reflected in funds that buy GEMAX.
Commodities: Gold has defied naysayers with a sharp rally, but the jury is still out on whether the gains will last.
Friday, February 19, 2016
Inflation, Crude Surprises Herald an Early Spring for Markets
TradeTheNews.com Weekly
Market Update: Inflation, Crude Surprises Herald an Early Spring for Markets
Fri, 19 Feb 2016 16:10 PM EST
The heightened volatility of early February gave way to slightly calmer global markets this week. The biggest story was the joint effort between Venezuela, Saudi Arabia and Russia to freeze crude production levels and put a floor under the market. A provisional agreement was reached on Tuesday, although without much buy-in from Iran. China returned from the week-long Lunar New Year holiday without any major market upsets and guided the Yuan notably higher, and a handful of more positive inflation and loan data helped calm nerves. More monetary easing looks to be on tap in both Japan and the euro zone next month. Meanwhile in the US, January PPI and CPI inflation readings came in hotter, further complicating the outlook for the FOMC on rates. The week saw the first 3 day rally for US indices this year while Treasury markets largely consolidated last week's move higher keeping the benchmark 10-year yield pegged near 1.75%. WTI can't get much if any traction above $30 and natural gas is fallen back towards the Dec low to trade at $1.80. For the week, the DJIA gained 2.6%, the S&P rose 2.8%, and the Nasdaq added 3.8%.
There were no big surprises in the minutes from the January FOMC meeting. As expected, the committee expressed deepening concerns that the ongoing decline in commodity prices and the rout in financial markets posed more risks to the US economic outlook. However, the members "judged that the overall implications of these developments for the outlook for domestic economic activity were unclear." Markets took the minutes overall to indicate officials are increasingly reluctant to raise rates in March and possibly the first half of 2016. This week Fed fund futures were pricing less than a 50% chance of any further rate hikes this year.
In a bid to stabilize an oversupplied market, Russia and OPEC members Saudi Arabia, Venezuela and Qatar reached a preliminary deal on Tuesday to freeze production at January levels, provided that other major producers followed suit. Iran reacted tepidly to the deal, issuing non-committal statements of support for the agreement while still insisting they would continue to target returning to the pre-sanction level of oil production. Iraq also said it "supported" the effort, but said it would not formally commit to the production freeze until other major producers did. As reports on the negotiations emerged, crude prices had momentary gains - Brent lunged for $36 a few times and WTI almost broke above $32 - however prices closed out Friday flat on the week, without sustaining any of these short-lived gains.
In Japan, the week kicked off with a very weak GDP figure and a huge gain for equities. Fourth-quarter GDP saw its biggest drop in 12 months, as the headline q/q figure hit -0.4% and the y/y measure was -1.4%. The bad news further strengthened expectations that the Bank of Japan would be forced to offer more stimulus, driving the Nikkei up 7.2% on Monday, its biggest one-day gain in three years. PM Abe's advisor Honda addressed the terrible GDP print later in the week, noting that in addition to possibility of more BoJ policy easing, he would also recommend a fiscal stimulus package of around ¥5T and also the postponement of the second round of sales tax increase until April 2019. Subsequent press reports indicated that Abe was not keen on more government stimulus or delaying the tax increase. USD/JPY had lifted off the 15-month lows around 111 last week, weakening to 114.8 early this week, then strengthened back to around 112.50 by Friday.
The Shanghai Composite played catch-up with last week's global volatility as it reopened for trading after a week-long break for the Lunar New Year holiday, falling more than 2% on Monday. However, some less bad economic data through the week helped lift the index and dispel some anxiety about China's economic prospects. January new loans hit a record high level and the January M2 money supply hit a 19-month high, although analysts rightly point out that this came as the PBoC pumped record amounts of liquidity into the system ahead of the holidays, fearing an epic cash crunch. Moreover, many expect these positive reports will not likely diminish the chance of another RRR cut sometime in the first quarter. January CPI rose at a healthy +1.8% y/y rate, a five-month high, driven mainly by higher food prices. The data hinted that persistent disinflationary forces may be waning, but many analysts said much of the better data could be ascribed to seasonal holiday factors.
It is looking more and more likely that the ECB will ease monetary policy again at its March meeting. Multiple ECB speakers addressed the issue in speeches this week. Draghi reiterated that the subject would be under consideration at the meeting, and added that Europe is facing significant challenges and increasing concerns about the global economy. ECB Vice President Constancio said action would be taken if it was determined that conditions have delayed the expected rise in inflation later this year, warning there could be another bout of disinflation in the first half of 2016. The Bank of Italy's Visco had the strongest take, calling on the ECB to act pre-emptively before a dramatic fall in inflation expectations took hold.
The European Union's negotiations with the UK crept closer to a deal to keep Britain in the union. UK PM Cameron held all-night negotiations on Thursday with top EU officials and a handful of leaders with specific objections to the draft text, mostly concerning welfare payments to immigrants. By late Friday, reports indicated a tentative deal had been reached. The UK referendum on EU membership will likely take place in mid-June, and a TNS poll out on Friday showed 36% of respondents said they would vote to leave the EU while only 34% said they would vote to remain in the union. Separately, Greece and its European creditors continued negotiations over bailout compliance, and managed not to produce any more of the market-moving headlines seen last week.
Mexico's central bank took action to shore up the peso, delivering a surprise rate hike on Wednesday. Banxico raised its overnight rate by 50 bps to 3.75% at an intra-meeting decision and said that peso weakness was threatening inflation expectations, forcing action. Recall that Banxico raised rates at a scheduled meeting back in December for the same reason. USD/MXN has plunged about 9% this year and more than 30% over the past year and a half to record lows, the biggest losses against the dollar among leading emerging market currencies in the current cycle. As a major oil producer, Mexico has been battered by falling oil prices, which Banxico Governor Carstens also discussed in justifying the move. USD/MXN gained 4% in the wake of the decision. Separately, the Bank of Korea held rates steady at its scheduled meeting, but the bank issued a statement warning that recent won currency weakness was "excessive" and warned against intensifying "herd behavior."
Earnings season is slowly drawing to a close, with the major retailers among the last to discloses quarterly results. Shares of Walmart closed out the week down 2.5% after it disclosed y/y declines in earnings and revenue, and a FY outlook that was weaker than the qualitative view offered at the annual investor day last fall. Sales comps were lower than expected.
In a long-expected development, Yahoo's board has formed a committee to explore strategic alternatives. The company has hired advisors, and said one focus will be the Alibaba sale via a reverse spinoff. Recall that earlier this month, the company launched a fresh round of restructuring, including a plan to lay off 15% of the workforce. Reports have indicated that close to two dozen public and private firms have expressed interest in various Yahoo assets and on Friday the board is said to have started returning some of their calls.
In M&A news, home security firm ADT agreed to be acquired by Apollo Global Management for nearly $7 billion, or $42/share in cash, a 56% premium the prior closing price. Apollo intends to merge ADT with another home security firm it owns, Protection 1. Chinese aviation and shipping conglomerate HNA Group reached a deal to buy electronics distributor Ingram Micro for about $6 billion, or $38.90/share in cash. This is the latest in a string of overseas buys by Chinese companies, which have been aggressively splurging on foreign acquisitions to sidestep slowing domestic growth.
Fri, 19 Feb 2016 16:10 PM EST
The heightened volatility of early February gave way to slightly calmer global markets this week. The biggest story was the joint effort between Venezuela, Saudi Arabia and Russia to freeze crude production levels and put a floor under the market. A provisional agreement was reached on Tuesday, although without much buy-in from Iran. China returned from the week-long Lunar New Year holiday without any major market upsets and guided the Yuan notably higher, and a handful of more positive inflation and loan data helped calm nerves. More monetary easing looks to be on tap in both Japan and the euro zone next month. Meanwhile in the US, January PPI and CPI inflation readings came in hotter, further complicating the outlook for the FOMC on rates. The week saw the first 3 day rally for US indices this year while Treasury markets largely consolidated last week's move higher keeping the benchmark 10-year yield pegged near 1.75%. WTI can't get much if any traction above $30 and natural gas is fallen back towards the Dec low to trade at $1.80. For the week, the DJIA gained 2.6%, the S&P rose 2.8%, and the Nasdaq added 3.8%.
There were no big surprises in the minutes from the January FOMC meeting. As expected, the committee expressed deepening concerns that the ongoing decline in commodity prices and the rout in financial markets posed more risks to the US economic outlook. However, the members "judged that the overall implications of these developments for the outlook for domestic economic activity were unclear." Markets took the minutes overall to indicate officials are increasingly reluctant to raise rates in March and possibly the first half of 2016. This week Fed fund futures were pricing less than a 50% chance of any further rate hikes this year.
In a bid to stabilize an oversupplied market, Russia and OPEC members Saudi Arabia, Venezuela and Qatar reached a preliminary deal on Tuesday to freeze production at January levels, provided that other major producers followed suit. Iran reacted tepidly to the deal, issuing non-committal statements of support for the agreement while still insisting they would continue to target returning to the pre-sanction level of oil production. Iraq also said it "supported" the effort, but said it would not formally commit to the production freeze until other major producers did. As reports on the negotiations emerged, crude prices had momentary gains - Brent lunged for $36 a few times and WTI almost broke above $32 - however prices closed out Friday flat on the week, without sustaining any of these short-lived gains.
In Japan, the week kicked off with a very weak GDP figure and a huge gain for equities. Fourth-quarter GDP saw its biggest drop in 12 months, as the headline q/q figure hit -0.4% and the y/y measure was -1.4%. The bad news further strengthened expectations that the Bank of Japan would be forced to offer more stimulus, driving the Nikkei up 7.2% on Monday, its biggest one-day gain in three years. PM Abe's advisor Honda addressed the terrible GDP print later in the week, noting that in addition to possibility of more BoJ policy easing, he would also recommend a fiscal stimulus package of around ¥5T and also the postponement of the second round of sales tax increase until April 2019. Subsequent press reports indicated that Abe was not keen on more government stimulus or delaying the tax increase. USD/JPY had lifted off the 15-month lows around 111 last week, weakening to 114.8 early this week, then strengthened back to around 112.50 by Friday.
The Shanghai Composite played catch-up with last week's global volatility as it reopened for trading after a week-long break for the Lunar New Year holiday, falling more than 2% on Monday. However, some less bad economic data through the week helped lift the index and dispel some anxiety about China's economic prospects. January new loans hit a record high level and the January M2 money supply hit a 19-month high, although analysts rightly point out that this came as the PBoC pumped record amounts of liquidity into the system ahead of the holidays, fearing an epic cash crunch. Moreover, many expect these positive reports will not likely diminish the chance of another RRR cut sometime in the first quarter. January CPI rose at a healthy +1.8% y/y rate, a five-month high, driven mainly by higher food prices. The data hinted that persistent disinflationary forces may be waning, but many analysts said much of the better data could be ascribed to seasonal holiday factors.
It is looking more and more likely that the ECB will ease monetary policy again at its March meeting. Multiple ECB speakers addressed the issue in speeches this week. Draghi reiterated that the subject would be under consideration at the meeting, and added that Europe is facing significant challenges and increasing concerns about the global economy. ECB Vice President Constancio said action would be taken if it was determined that conditions have delayed the expected rise in inflation later this year, warning there could be another bout of disinflation in the first half of 2016. The Bank of Italy's Visco had the strongest take, calling on the ECB to act pre-emptively before a dramatic fall in inflation expectations took hold.
The European Union's negotiations with the UK crept closer to a deal to keep Britain in the union. UK PM Cameron held all-night negotiations on Thursday with top EU officials and a handful of leaders with specific objections to the draft text, mostly concerning welfare payments to immigrants. By late Friday, reports indicated a tentative deal had been reached. The UK referendum on EU membership will likely take place in mid-June, and a TNS poll out on Friday showed 36% of respondents said they would vote to leave the EU while only 34% said they would vote to remain in the union. Separately, Greece and its European creditors continued negotiations over bailout compliance, and managed not to produce any more of the market-moving headlines seen last week.
Mexico's central bank took action to shore up the peso, delivering a surprise rate hike on Wednesday. Banxico raised its overnight rate by 50 bps to 3.75% at an intra-meeting decision and said that peso weakness was threatening inflation expectations, forcing action. Recall that Banxico raised rates at a scheduled meeting back in December for the same reason. USD/MXN has plunged about 9% this year and more than 30% over the past year and a half to record lows, the biggest losses against the dollar among leading emerging market currencies in the current cycle. As a major oil producer, Mexico has been battered by falling oil prices, which Banxico Governor Carstens also discussed in justifying the move. USD/MXN gained 4% in the wake of the decision. Separately, the Bank of Korea held rates steady at its scheduled meeting, but the bank issued a statement warning that recent won currency weakness was "excessive" and warned against intensifying "herd behavior."
Earnings season is slowly drawing to a close, with the major retailers among the last to discloses quarterly results. Shares of Walmart closed out the week down 2.5% after it disclosed y/y declines in earnings and revenue, and a FY outlook that was weaker than the qualitative view offered at the annual investor day last fall. Sales comps were lower than expected.
In a long-expected development, Yahoo's board has formed a committee to explore strategic alternatives. The company has hired advisors, and said one focus will be the Alibaba sale via a reverse spinoff. Recall that earlier this month, the company launched a fresh round of restructuring, including a plan to lay off 15% of the workforce. Reports have indicated that close to two dozen public and private firms have expressed interest in various Yahoo assets and on Friday the board is said to have started returning some of their calls.
In M&A news, home security firm ADT agreed to be acquired by Apollo Global Management for nearly $7 billion, or $42/share in cash, a 56% premium the prior closing price. Apollo intends to merge ADT with another home security firm it owns, Protection 1. Chinese aviation and shipping conglomerate HNA Group reached a deal to buy electronics distributor Ingram Micro for about $6 billion, or $38.90/share in cash. This is the latest in a string of overseas buys by Chinese companies, which have been aggressively splurging on foreign acquisitions to sidestep slowing domestic growth.
Sunday, February 14, 2016
Barron's Saturday summary: Positive on DWN.DE, CUB, ESL, KEY, BMY; Cautious on VIA, LNKD, JPM, RACE, CS
Cover story: The rise of Donald Trump and Bernie Sanders in the presidential race "could be one more reason why stock markets are under pressure and could remain so for awhile"; Investors, who are generally more comfortable with establishment candidates, have reason to be nervous about the campaign's direction.
Tech Trader: Amid the recent rout in the tech sector, mega-cap companies such as AAPL, CSCO, GOOGL, and FB remain powerful in their markets, while smaller players such as QLIK, DATA, and LNKD are feeling the pain, partly because of high valuations and expectations.
Trader: When the Chinese market gets back in the swing of things next week after the Asian New Year break, there could be volatility if growth slowdown fears return; Cautious on VIA: Nothing much is likely to change at the company as long as Sumner Redstone remains a presence, and long-term oriented investors who find the shares attractive because they're undervalued may have to wait some time for a payoff; Cautious on LNKD: Amid skepticism and worry in the tech market, company's growth is likely to keep decelerating, shares remain overvalued, and margins are declining.
Profile: Mammen Chally, lead manager, Hartford Core Equity fund, looks for three traits in a company: improving quality via capital structure or competitive situation; business momentum; and lower-than-average valuation (top 10 holdings: GOOGL, MSFT, CVS, JPM, COST, MDLZ, AAPL, AGN, MO, PNC).
Interview: Don Morgan, chief investment officer at Brigade Capital, says the risk/return ratio in the bond market is favorable relative to other asset classes, and that high-yield bond prices could rise sharply (picks: Albertson's 7.45% due 2029, AMD 7.75% due 2020, Consol Energy 5.875% due 2022, Savine Pass (Cheniere) 5.75% due 2024, Puerto Rico 5% GO due 2041).
Features:
1) Positive on BMY: Company's cancer-fighting medicine Opdivo has earned FDA approval and has the potential for $8-9B in annual sales, making the pharma giant's shares a good bet for long-term investors;
2) Positive on KEY: Shares of bank look cheap by historical standards, and its acquisition of FNFG could prove more lucrative than investors expect; firm's 2.9% dividend payout could go up this year, and shares could return 30% or more;
3) Positive on CORE: Wholesale distributor is benefiting as the stores it serves see more foot traffic, but its customers remain vulnerable to growing competition from WMT and DG, and to the severity of tobacco-sale restrictions.
Small Caps: Positive on CUB: Shares of the maker of fare-collections systems for transit services have fallen, but the resultant selloff looks like an overreaction, and a buying opportunity for investors; Positive on ESL: Selloff following a poor earnings report in February offers an opening for investors; company has an attractive franchise, and an activist investor could take interest.
Follow-Up: Cautious on JPM: Chief Jamie Dimon's decision to buy shares gave them a boost, but investors in the banking sector still worry about potential problems in the global economy and trouble with European firms; Cautious on CS: Despite a plunge in shares, bargain hunters should take a pass and seek safer firms that trade cheaply; the bank continues to face heat from regulators related to tax evaders; Cautious on RACE: Shares are selling far below their IPO price, and are likely to stay there until the bull market returns.
European Trader: "Bloodletting in the European banking sector may not be over despite last week's brutal selloff," and uncertainty remains amid negative interest rates and other issues in the eurozone; Positive on Deutsche Wohnen: German property stock is worth a look for investors.
Asian Trader: Some investors wonder if all the bad news in Thailand is already reflected in the market, paving the way for bargain hunting, but that view is premature.
Emerging Markets: Venezuela's "political disarray and shortage of dollars have put its bonds in a tinderbox," and though default may not be imminent, many observers see it as an eventuality.
Commodities: Orange juice is no longer the consumer staple it once was, and a case can be made that its futures market "will go the way of the dodo."
CEO Spotlight: UA founder and chief executive Kevin Plank says the "athleisure" trend is here to stay, and that the company plans to expand internationally to ease its dependence on North America and gain ground on rival NKE
Cover story: The rise of Donald Trump and Bernie Sanders in the presidential race "could be one more reason why stock markets are under pressure and could remain so for awhile"; Investors, who are generally more comfortable with establishment candidates, have reason to be nervous about the campaign's direction.
Tech Trader: Amid the recent rout in the tech sector, mega-cap companies such as AAPL, CSCO, GOOGL, and FB remain powerful in their markets, while smaller players such as QLIK, DATA, and LNKD are feeling the pain, partly because of high valuations and expectations.
Trader: When the Chinese market gets back in the swing of things next week after the Asian New Year break, there could be volatility if growth slowdown fears return; Cautious on VIA: Nothing much is likely to change at the company as long as Sumner Redstone remains a presence, and long-term oriented investors who find the shares attractive because they're undervalued may have to wait some time for a payoff; Cautious on LNKD: Amid skepticism and worry in the tech market, company's growth is likely to keep decelerating, shares remain overvalued, and margins are declining.
Profile: Mammen Chally, lead manager, Hartford Core Equity fund, looks for three traits in a company: improving quality via capital structure or competitive situation; business momentum; and lower-than-average valuation (top 10 holdings: GOOGL, MSFT, CVS, JPM, COST, MDLZ, AAPL, AGN, MO, PNC).
Interview: Don Morgan, chief investment officer at Brigade Capital, says the risk/return ratio in the bond market is favorable relative to other asset classes, and that high-yield bond prices could rise sharply (picks: Albertson's 7.45% due 2029, AMD 7.75% due 2020, Consol Energy 5.875% due 2022, Savine Pass (Cheniere) 5.75% due 2024, Puerto Rico 5% GO due 2041).
Features:
1) Positive on BMY: Company's cancer-fighting medicine Opdivo has earned FDA approval and has the potential for $8-9B in annual sales, making the pharma giant's shares a good bet for long-term investors;
2) Positive on KEY: Shares of bank look cheap by historical standards, and its acquisition of FNFG could prove more lucrative than investors expect; firm's 2.9% dividend payout could go up this year, and shares could return 30% or more;
3) Positive on CORE: Wholesale distributor is benefiting as the stores it serves see more foot traffic, but its customers remain vulnerable to growing competition from WMT and DG, and to the severity of tobacco-sale restrictions.
Small Caps: Positive on CUB: Shares of the maker of fare-collections systems for transit services have fallen, but the resultant selloff looks like an overreaction, and a buying opportunity for investors; Positive on ESL: Selloff following a poor earnings report in February offers an opening for investors; company has an attractive franchise, and an activist investor could take interest.
Follow-Up: Cautious on JPM: Chief Jamie Dimon's decision to buy shares gave them a boost, but investors in the banking sector still worry about potential problems in the global economy and trouble with European firms; Cautious on CS: Despite a plunge in shares, bargain hunters should take a pass and seek safer firms that trade cheaply; the bank continues to face heat from regulators related to tax evaders; Cautious on RACE: Shares are selling far below their IPO price, and are likely to stay there until the bull market returns.
European Trader: "Bloodletting in the European banking sector may not be over despite last week's brutal selloff," and uncertainty remains amid negative interest rates and other issues in the eurozone; Positive on Deutsche Wohnen: German property stock is worth a look for investors.
Asian Trader: Some investors wonder if all the bad news in Thailand is already reflected in the market, paving the way for bargain hunting, but that view is premature.
Emerging Markets: Venezuela's "political disarray and shortage of dollars have put its bonds in a tinderbox," and though default may not be imminent, many observers see it as an eventuality.
Commodities: Orange juice is no longer the consumer staple it once was, and a case can be made that its futures market "will go the way of the dodo."
CEO Spotlight: UA founder and chief executive Kevin Plank says the "athleisure" trend is here to stay, and that the company plans to expand internationally to ease its dependence on North America and gain ground on rival NKE
Friday, February 12, 2016
Everybody's Going Negative
TradeTheNews.com Weekly
Market Update: Everybody's Going Negative
Fri, 12 Feb 2016 16:16 PM EST
Volatility shook global markets this week as participants grappled with a non-stop series of confidence-shaking developments. In Europe, jitters about the solidity of bank capital levels drove shares of Deutsche Bank down as much as 10% at one point and undercut broader equity indices. Meanwhile, Greece appeared to backtrack on pension reform commitments, compounding the worries about Europe. In the US, Fed Chair Yellen's Congressional testimony revealed little about the chances of more rate hikes this year, however her words of caution about the US economy added weight, strongly inferring the Fed will keep rates on hold in March. The dollar weakened further as markets all but priced out the chances of Fed hikes this year, driving the biggest monthly decline in USD/JPY since Oct 2008 and further strength in the euro. Mainland Chinese markets were closed all week for the Lunar New Year, but on Thursday, Hong Kong's Hang Seng opened for trade and plunged 3.9%, catching up with the western selloff. Crude prices hit 15-year lows on talk that an OPEC/non-OPEC production deal was dead, then saw 10% gains Friday on talk the deal was back on, whipping around energy stocks along the way. Concerns about the banking sector drove gold prices to a one year high, briefly rising above $1260 while Treasury yields tumbled. The US curve reached its flattest levels since 2008 when the spread between the US 2 and 10-year yields fell below 1.00%. For the week, the DJIA slumped 1.4%, the S&P dropped 0.8%, and the Nasdaq lost 0.6%.
During her two days of Congressional testimony, Fed Chair Yellen repeated her firm stance that it would be premature to draw any conclusions about deteriorating market conditions or make judgements about what the Fed might do in March. However, she affirmed that market conditions would play a big role in the March decision. Regarding the strength in employment, Yellen cautioned that job creation has been skewed toward lower paid sectors, with the data giving only tentative signs of wages rising.
In light of moves by the BOJ and ECB, Yellen was asked repeatedly whether negative rates were in the realm of the possible for the Fed. She would not rule out the use of negative rates as part of the Fed toolkit if conditions worsen, but said the issue required more study. Interestingly, Yellen disclosed that the Fed had considered going negative in 2010 but decided it wouldn't be the best course at that time. As of Friday, Fed fund futures were pricing only about a 25% chance of one rate hike in December.
The greenback continued to weaken against its major pairs as markets pushed forecasts for Fed hikes out further and further. Meanwhile, flight-to-safety and the unwind of the short yen/long Japan stocks trade continued to drive the yen higher; the currency has gained nearly 9% against the dollar since the BoJ adopted negative rates in late January. USD/JPY dropped to 15-month lows early on Thursday, drawing strong verbal intervention from Japanese officials. As the pair dropped below 112, there were rumors the BoJ was checking rates - marking the first intervention by the bank since summer 2014 - then on Friday BoJ Chief Kuroda and various cabinet officials met to discuss the situation. USD/JPY rose off the ~111.00 lows on the verbal intervention, but not by much. The euro also kept gaining against the dollar, with EUR/USD nearly reaching 1.1400 on Thursday, for fresh four-month highs.
China's foreign reserves decline was nearly as bad as expected in January, confirming fears that Beijing is rapidly burning through cash in its attempts to prop up the yuan and the Chinese economy. Total reserves fell for the third straight month to a three-year low in January, although the decline of $99.5B was less than the record high $107.9B in December. The total reserves stand at $3.23 trillion, however analysts estimate that liquid, accessible reserves could be as low as $2 trillion. Noted China skeptic Kyle Bass said that the nation's liquid foreign reserves were already below a critical level and China's back was already up against the wall. With Chinese markets closed all week for the Lunar New Year, there were no yuan fixings, although the offshore yuan rose to a two-month high of 6.5272.
Sweden's Riksbank unsettled markets at its scheduled policy meeting on Thursday by cutting rates even further than expected into negative territory. The central bank cut its main repo rate by 15 bps to -0.50% (expectations were for a 10 bps cut) and commented it felt forced to act because of "weakening confidence" in achieving its inflation target of 2%. There was a familiar split in European sovereign rates after the move, with core UK, German and French 10-year yields dropping to fresh record lows, while peripheral yields moved higher.
The Greece crisis has returned to headlines, providing a familiar source of deep uncertainty for European markets. On Friday, February 5th, talks on the ongoing Greek pension reform process between Athens and its European creditors ended on a very bad note. On Monday, the Athens stock exchange fell nearly 9%, dropping to its lowest level since 1990, its fifth consecutive day of losses. The creditors said the budget gap for 2016 was too big and the government had no credible strategy for fixing the deficit. Greek officials were still stonewalling their European partners as of Friday. Yields on the sovereign debt of Spain, Portugal and Italy follow a predictable pattern, as peripheral debt sold off.
Peripheral jitters were not the only problem for Europe this week, as contingent convertible bonds (CoCos) emerged as a big worry for the banking sector. On Monday, Cantor Fitzgerald published a note overflowing with concerns about Deutsche Bank's CoCos, which carry relatively high yields and allow the bank to skip payments and in certain cases convert the notes to equity in times of stress without causing a default. Cantor and others are worried that market shocks might force European banks to stop paying coupons, and investors have been dumping the instruments over recent weeks, undermining confidence in bank capital levels and sending certain bank CDS much higher. Frankfurt-traded shares of Deutsche Bank tanked 12% in the two days after the Cantor note, then gyrated up and down in double digit percentage moves through the week as rumors circulated that the bank would buy back billions in senior debt. The $5.4 billion tender was officially announced on Friday, and shares of DB firmed up. Shares of other major banks followed DB higher, and they were also helped by a report that JP Morgan CEO Jamie Dimon recently bought 500K shares of his own bank's stock.
Shares of the second largest natural gas producer in the United States, Chesapeake Energy, collapsed on Monday after reports made the rounds that the firm had hired Kirkland & Ellis, a law firm that specializes in restructuring. The company issued a statement asserting that Kirkland & Ellis LLP has served as one of the firm's outside counsels since 2010 and claimed the company has no plans to pursue bankruptcy. But the damage was done: shares of CHK fell 50% on Monday and only recovered a fraction of the loss through Friday as commentator suggested some form of bankruptcy or restructuring is the most likely outcome given the firm's huge debt load. Meanwhile, Anadarko cut its dividend 82% to conserve cash.
Earnings season is about 2/3 over at this point, with the bulk of the DJIA and S&P500 components out of the way. Disney fell 4% to 12-month lows despite widely topping earnings and revenue expectations, as investors zoomed in on shrinking ESPN profit levels. Coca-Cola's organic revenue declined y/y while its total concentrate sales fell 3%, however profits held up thanks to higher pricing. Cisco saw 10% gains on the week after its net income rose more than 25% y/y and earnings topped expectations. Tesla disclosed a big loss in its fourth quarter, however the firm's ambitious 2016 deliveries forecast and solid Model S deliveries more than made up for it. Twitter hit new all-time lows after disclosing very poor fourth-quarter user growth metrics. Mylan tanked 20% after its earnings miss and announcing it agreed to pay nearly $10B for Sweden's Meda.
Fri, 12 Feb 2016 16:16 PM EST
Volatility shook global markets this week as participants grappled with a non-stop series of confidence-shaking developments. In Europe, jitters about the solidity of bank capital levels drove shares of Deutsche Bank down as much as 10% at one point and undercut broader equity indices. Meanwhile, Greece appeared to backtrack on pension reform commitments, compounding the worries about Europe. In the US, Fed Chair Yellen's Congressional testimony revealed little about the chances of more rate hikes this year, however her words of caution about the US economy added weight, strongly inferring the Fed will keep rates on hold in March. The dollar weakened further as markets all but priced out the chances of Fed hikes this year, driving the biggest monthly decline in USD/JPY since Oct 2008 and further strength in the euro. Mainland Chinese markets were closed all week for the Lunar New Year, but on Thursday, Hong Kong's Hang Seng opened for trade and plunged 3.9%, catching up with the western selloff. Crude prices hit 15-year lows on talk that an OPEC/non-OPEC production deal was dead, then saw 10% gains Friday on talk the deal was back on, whipping around energy stocks along the way. Concerns about the banking sector drove gold prices to a one year high, briefly rising above $1260 while Treasury yields tumbled. The US curve reached its flattest levels since 2008 when the spread between the US 2 and 10-year yields fell below 1.00%. For the week, the DJIA slumped 1.4%, the S&P dropped 0.8%, and the Nasdaq lost 0.6%.
During her two days of Congressional testimony, Fed Chair Yellen repeated her firm stance that it would be premature to draw any conclusions about deteriorating market conditions or make judgements about what the Fed might do in March. However, she affirmed that market conditions would play a big role in the March decision. Regarding the strength in employment, Yellen cautioned that job creation has been skewed toward lower paid sectors, with the data giving only tentative signs of wages rising.
In light of moves by the BOJ and ECB, Yellen was asked repeatedly whether negative rates were in the realm of the possible for the Fed. She would not rule out the use of negative rates as part of the Fed toolkit if conditions worsen, but said the issue required more study. Interestingly, Yellen disclosed that the Fed had considered going negative in 2010 but decided it wouldn't be the best course at that time. As of Friday, Fed fund futures were pricing only about a 25% chance of one rate hike in December.
The greenback continued to weaken against its major pairs as markets pushed forecasts for Fed hikes out further and further. Meanwhile, flight-to-safety and the unwind of the short yen/long Japan stocks trade continued to drive the yen higher; the currency has gained nearly 9% against the dollar since the BoJ adopted negative rates in late January. USD/JPY dropped to 15-month lows early on Thursday, drawing strong verbal intervention from Japanese officials. As the pair dropped below 112, there were rumors the BoJ was checking rates - marking the first intervention by the bank since summer 2014 - then on Friday BoJ Chief Kuroda and various cabinet officials met to discuss the situation. USD/JPY rose off the ~111.00 lows on the verbal intervention, but not by much. The euro also kept gaining against the dollar, with EUR/USD nearly reaching 1.1400 on Thursday, for fresh four-month highs.
China's foreign reserves decline was nearly as bad as expected in January, confirming fears that Beijing is rapidly burning through cash in its attempts to prop up the yuan and the Chinese economy. Total reserves fell for the third straight month to a three-year low in January, although the decline of $99.5B was less than the record high $107.9B in December. The total reserves stand at $3.23 trillion, however analysts estimate that liquid, accessible reserves could be as low as $2 trillion. Noted China skeptic Kyle Bass said that the nation's liquid foreign reserves were already below a critical level and China's back was already up against the wall. With Chinese markets closed all week for the Lunar New Year, there were no yuan fixings, although the offshore yuan rose to a two-month high of 6.5272.
Sweden's Riksbank unsettled markets at its scheduled policy meeting on Thursday by cutting rates even further than expected into negative territory. The central bank cut its main repo rate by 15 bps to -0.50% (expectations were for a 10 bps cut) and commented it felt forced to act because of "weakening confidence" in achieving its inflation target of 2%. There was a familiar split in European sovereign rates after the move, with core UK, German and French 10-year yields dropping to fresh record lows, while peripheral yields moved higher.
The Greece crisis has returned to headlines, providing a familiar source of deep uncertainty for European markets. On Friday, February 5th, talks on the ongoing Greek pension reform process between Athens and its European creditors ended on a very bad note. On Monday, the Athens stock exchange fell nearly 9%, dropping to its lowest level since 1990, its fifth consecutive day of losses. The creditors said the budget gap for 2016 was too big and the government had no credible strategy for fixing the deficit. Greek officials were still stonewalling their European partners as of Friday. Yields on the sovereign debt of Spain, Portugal and Italy follow a predictable pattern, as peripheral debt sold off.
Peripheral jitters were not the only problem for Europe this week, as contingent convertible bonds (CoCos) emerged as a big worry for the banking sector. On Monday, Cantor Fitzgerald published a note overflowing with concerns about Deutsche Bank's CoCos, which carry relatively high yields and allow the bank to skip payments and in certain cases convert the notes to equity in times of stress without causing a default. Cantor and others are worried that market shocks might force European banks to stop paying coupons, and investors have been dumping the instruments over recent weeks, undermining confidence in bank capital levels and sending certain bank CDS much higher. Frankfurt-traded shares of Deutsche Bank tanked 12% in the two days after the Cantor note, then gyrated up and down in double digit percentage moves through the week as rumors circulated that the bank would buy back billions in senior debt. The $5.4 billion tender was officially announced on Friday, and shares of DB firmed up. Shares of other major banks followed DB higher, and they were also helped by a report that JP Morgan CEO Jamie Dimon recently bought 500K shares of his own bank's stock.
Shares of the second largest natural gas producer in the United States, Chesapeake Energy, collapsed on Monday after reports made the rounds that the firm had hired Kirkland & Ellis, a law firm that specializes in restructuring. The company issued a statement asserting that Kirkland & Ellis LLP has served as one of the firm's outside counsels since 2010 and claimed the company has no plans to pursue bankruptcy. But the damage was done: shares of CHK fell 50% on Monday and only recovered a fraction of the loss through Friday as commentator suggested some form of bankruptcy or restructuring is the most likely outcome given the firm's huge debt load. Meanwhile, Anadarko cut its dividend 82% to conserve cash.
Earnings season is about 2/3 over at this point, with the bulk of the DJIA and S&P500 components out of the way. Disney fell 4% to 12-month lows despite widely topping earnings and revenue expectations, as investors zoomed in on shrinking ESPN profit levels. Coca-Cola's organic revenue declined y/y while its total concentrate sales fell 3%, however profits held up thanks to higher pricing. Cisco saw 10% gains on the week after its net income rose more than 25% y/y and earnings topped expectations. Tesla disclosed a big loss in its fourth quarter, however the firm's ambitious 2016 deliveries forecast and solid Model S deliveries more than made up for it. Twitter hit new all-time lows after disclosing very poor fourth-quarter user growth metrics. Mylan tanked 20% after its earnings miss and announcing it agreed to pay nearly $10B for Sweden's Meda.
Saturday, February 6, 2016
Barron's Saturday summary: Cover predicts oil could drop to $20/bbl and then rebound sharply; positive on CELG, GILD
Cover story: "Oil could fall as low as $20 a barrel in the first half of this year, recovering to $55 by year end. That could help drive stocks, which have closely followed oil prices, much higher"; Stock traders "may be subscribing to the misguided belief that low oil prices are signaling imminent global recession."
Features:
1) The Barron's/Lipper Fund Family ranking for 2015 is topped by Sit Investment Associates, Eaton Vance, and Thrivent Financial;
2) Positive on CELG, GILD: Companies rely on a few closely related medicines for the bulk of their income, but they are profitable and the recent drop in the sector creates a buying opportunity; shares of each could trade 30% higher during the next year;
3) Kevin Kaiser of Hedgeeye, whose short bets on KMI, LINE, and CHK have paid off, says the worst may not be over for master limited partnerships, which continue to face a number of challenges.
Technology Trader: The plunge in tech shares such as CRM, WDAY, and NOW shows that cloud-computing companies aren't immune to macroeconomic conditions, which are weighing on corporate budgets, though even after Friday's drubbing their shares remain high; Cautious on INFN, ANET, FNSR, CIEN, AVGO: It's unclear whether companies that supply the infrastructure for cloud computing will suffer as the market loses faith in that sector's growth.
Tech Trader: Non-cyclical companies, including staples and utilities, are on track to show 4.3% earnings growth this year, and domestic companies are vastly outperforming international ones; Cautious on CHD: Maker of Arm & Hammer and other consumer brands is vulnerable to competitive pressure in its core markets from rivals such as PG, and share remain pricey; Positive on TMO: Shares of world's largest scientific equipment maker are down, but a boom in research funding and smart acquisitions could lift them 25% in the next year.
Interview: Ed Yardeni of Yardeni Research says the Fed "is focused on just two mandates-the unemployment and inflation rates-but is averse to thinking about foreign exchange and global credit markets."
Profile: Raman Srivastava, portfolio manager, Dreyfus/Standish Global Fixed Income fund, which has benefited from a hefty weighting of developed-country government bonds and a low quotient of riskier high-yield and emerging-market bonds (top 10 government bond holdings: Australia 2018, Italy 2024, Australia 2025, Japan 2044, Canada 2024, Australia 2019, Italy 2019, Korea 2025, Australia 2024, Germany 2046).
Small Caps: Positive on TOWN, SBCF: Though shares are down, small banks are benefiting from industry consolidation, and with a rebound their stock should generate healthy returns.
Follow-Up: Positive on AMZN: Share price "looks reasonable relative to the profits analysts expect Amazon to make by the end of the decade"; Cautious on GPRO: Barron's continues its contrarian stance on the camera maker; an acquisition by AAPL is unlikely, but SNE or UA could bite, though there's a good change once acquired the brand would cease to exist; Positive on VNTV: Payment processor should continue to benefit as more merchants embrace the EMV standard, and shares could have 15% upside.
European Trader: Positive on ITV: London-based broadcaster should see increased ad revenue, and it has several potential avenues for growth; EPS could climb this year at a double-digit rate.
Asian Trader: Hong Kong continues to face problems, and as a global financial center, it imports volatility from the U.S. and China, two largely uncorrelated stock markets.
Emerging Markets: Argentina's problems are far from over, but reform-minded president Mauricio Macri has devalued the peso, cut energy subsidies, and secured financing to reduce the deficit.
Commodities: Cocoa has fallen this year amid the general drop in commodities, though it managed to buck the trend until last year's third quarter, and any rebound is likely to be small.
Streetwise: Chinese companies can't make acquisitions in "strategic" U.S. industries, but there are still a wide range of options; potential targets include JOY, TRN, GBX, EMR.
Cover story: "Oil could fall as low as $20 a barrel in the first half of this year, recovering to $55 by year end. That could help drive stocks, which have closely followed oil prices, much higher"; Stock traders "may be subscribing to the misguided belief that low oil prices are signaling imminent global recession."
Features:
1) The Barron's/Lipper Fund Family ranking for 2015 is topped by Sit Investment Associates, Eaton Vance, and Thrivent Financial;
2) Positive on CELG, GILD: Companies rely on a few closely related medicines for the bulk of their income, but they are profitable and the recent drop in the sector creates a buying opportunity; shares of each could trade 30% higher during the next year;
3) Kevin Kaiser of Hedgeeye, whose short bets on KMI, LINE, and CHK have paid off, says the worst may not be over for master limited partnerships, which continue to face a number of challenges.
Technology Trader: The plunge in tech shares such as CRM, WDAY, and NOW shows that cloud-computing companies aren't immune to macroeconomic conditions, which are weighing on corporate budgets, though even after Friday's drubbing their shares remain high; Cautious on INFN, ANET, FNSR, CIEN, AVGO: It's unclear whether companies that supply the infrastructure for cloud computing will suffer as the market loses faith in that sector's growth.
Tech Trader: Non-cyclical companies, including staples and utilities, are on track to show 4.3% earnings growth this year, and domestic companies are vastly outperforming international ones; Cautious on CHD: Maker of Arm & Hammer and other consumer brands is vulnerable to competitive pressure in its core markets from rivals such as PG, and share remain pricey; Positive on TMO: Shares of world's largest scientific equipment maker are down, but a boom in research funding and smart acquisitions could lift them 25% in the next year.
Interview: Ed Yardeni of Yardeni Research says the Fed "is focused on just two mandates-the unemployment and inflation rates-but is averse to thinking about foreign exchange and global credit markets."
Profile: Raman Srivastava, portfolio manager, Dreyfus/Standish Global Fixed Income fund, which has benefited from a hefty weighting of developed-country government bonds and a low quotient of riskier high-yield and emerging-market bonds (top 10 government bond holdings: Australia 2018, Italy 2024, Australia 2025, Japan 2044, Canada 2024, Australia 2019, Italy 2019, Korea 2025, Australia 2024, Germany 2046).
Small Caps: Positive on TOWN, SBCF: Though shares are down, small banks are benefiting from industry consolidation, and with a rebound their stock should generate healthy returns.
Follow-Up: Positive on AMZN: Share price "looks reasonable relative to the profits analysts expect Amazon to make by the end of the decade"; Cautious on GPRO: Barron's continues its contrarian stance on the camera maker; an acquisition by AAPL is unlikely, but SNE or UA could bite, though there's a good change once acquired the brand would cease to exist; Positive on VNTV: Payment processor should continue to benefit as more merchants embrace the EMV standard, and shares could have 15% upside.
European Trader: Positive on ITV: London-based broadcaster should see increased ad revenue, and it has several potential avenues for growth; EPS could climb this year at a double-digit rate.
Asian Trader: Hong Kong continues to face problems, and as a global financial center, it imports volatility from the U.S. and China, two largely uncorrelated stock markets.
Emerging Markets: Argentina's problems are far from over, but reform-minded president Mauricio Macri has devalued the peso, cut energy subsidies, and secured financing to reduce the deficit.
Commodities: Cocoa has fallen this year amid the general drop in commodities, though it managed to buck the trend until last year's third quarter, and any rebound is likely to be small.
Streetwise: Chinese companies can't make acquisitions in "strategic" U.S. industries, but there are still a wide range of options; potential targets include JOY, TRN, GBX, EMR.
Friday, February 5, 2016
Markets Reprice Fed Policy Forecasts
TradeTheNews.com Weekly
Market Update: Markets Reprice Fed Policy Forecasts
Fri, 05 Feb 2016 16:09 PM EST
After two weeks of moves sideways or higher, most global equity markets resumed the downtrend seen in early January. The big exception was the suspiciously calm Shanghai Composite, which eked out a modest gain ahead of China's Lunar New Year holiday week and was much less volatile than in recent weeks. With central bank largess pacifying most of Europe and Asia, concern about the US played a central role. The dollar saw its biggest weekly decline against the index since 2009, while US treasuries rallied and the 10-year UST yield sank as low as 1.790% on Wednesday, its lowest level since last February and within half a percentage point of the record low of 1.380% seen in 2012. Analysts reoriented their forecasts on Fed policy moves, with many suggesting only one or two rate hikes may be possible this year. Lower interest rates slammed US banks, as shares of a raft of major US financials hit 52-week lows. Commodity prices broadly lifted outside of energy, on the outlook for lower rates allowing the beaten down global materials stocks to enjoy a modest rebound. Gold moved back above the 200-day moving average for the first time since November while the mining stocks saw big outperformance. Weak earnings results from many oil and tech names provided no relief and for the week the DJIA lost 1.6%, the S&P fell 1.3%, and the Nasdaq plunged 5.4%.
Markets recalibrated their outlook for Fed monetary policy this week, helping to weaken the greenback. In a note published on Tuesday, Goldman Sachs pushed its forecast for the next Fed interest rate hike out to June from March, and lowered its view for the number of increases this year to three from four. On Wednesday, New York Fed Governor Dudley acknowledged that conditions were worse now than they were in December when the FOMC delivered its first rate hike, but also stated the FOMC was not ready to draw very many conclusions about policy right now. Dudley's cautious comments about the strong dollar also helped momentum. The closely-watched dollar index fell more than 3% on the week and gave up all its gains since late October. EUR/USD climbed more than three big figures on the week - rising from 1.0850 to around 1.1200 - putting the dollar at its weakest level against the euro since last fall, when the ECB began hinting about additional QE measures and tanked the single currency.
Key US January data raised tough questions about the state of the domestic economy. The ISM manufacturing PMI remained in contraction territory for the third month in row, while the employment component dropped to its lowest level since June 2009 (45.9 vs 48.0). Services PMIs deteriorated, with the Markit reading dropping to its lowest point in the series in 27 months and the ISM data at its weakest since March 2014. The January US jobs report was a mixed bag: the nonfarm figure was +151K, well below expectations and the weakest total since the +149K gain in September, while the December nonfarm figure was revised down by 10% to 262K. On the other hand, unemployment declined to 4.9%, pushing the economy even closer to full employment. Hourly earnings were materially higher, giving the Fed some of the wage inflation it has been looking for.
Global interest rates descended after the Bank of Japan's move to negative interest rates late last week. Two-year yields fell to -0.5% in Germany and -0.2% in Japan, where the 10-year yield touched 0.025%. The sugar high felt by the yen wore off quickly, as USD/JPY dropped back to the 116-118 area it had been occupying in the weeks leading up to the BoJ decision, off the 121.50 area. BoJ Governor Kuroda spoke extensively about last week's decision, stating that just because negative rates were adopted it does not mean the bank is out of ammunition to expand asset buying. Kuroda said he is still concerned that inflation expectations will weaken in medium term, but for now saw the economy recovering moderately. He reiterated the BoJ is prepared to push further into negative rates, if necessary.
Crude prices were volatile this week, and despite the snapback on dollar weakness remained below last week's highs. Coming into the week, prices dipped on the weak China manufacturing numbers and a round of denials that an emergency OPEC meeting would be taking place. WTI sank around 11% to below $29.50 and Brent dropped 10% to $32.30 on Monday and Tuesday as hopes for coordinated production cuts were crushed. OPEC and Russia January production reports showed modest growth in output, further pressuring prices. Russia pumped the equivalent of 18.9M bpd, +1.5% y/y, a post-Soviet record. The plummeting dollar revived prices briefly, but both contracts were well off their highs as the week drew to a close, with Brent around $34/bbland WTI below $31/bbl.
After the market volatility last August and this January, China's FX reserve levels have become a point of concern for broader markets. The December data showed the biggest monthly decline on record in Chinese reserves. For 2015 overall, reserved declined $513B, the biggest annual drop ever. The January report drops over the weekend, and expectations are for another record drop by more than $100 billion, to a total of $3.2 trillion. While this number is almost unimaginably huge, some analysts suggested that markets would start to worry if the total dropped to $2.8 billion or less, as the PBoC could be forced to let the yuan slide lower with dramatic consequences. Needless to say, the softer dollar gave the Chinese breathing room in their struggle to manage the yuan this week.
The BoE's Monetary Policy Committee returned to unanimity for the first time since last July, voting 9-0 to keep interest rates on hold at record lows. McCafferty, the MPC's only real hawk, switched his vote to the majority and conceded to the data, noting that the pick-up in wage growth has been more muted than expected. And while the committee also cut its economic growth outlook over global growth concerns, it also stated that a rate hike would be more likely than not over the forecast period. At his press conference, Governor Carney said the committee did not discuss negative interest rates and reiterated that the whole MPC believes the next rate move likely higher, not lower. Cable leaped to one-month highs after the decision, testing briefly above 1.4650 before dropping to 1.4470 on Friday.
The Q4 earnings season is in full bloom but results have not been a boon for the equity markets. Results in the tech sector included some notable disappointments. GoPro sales bombed during the holiday quarter and guidance was even worse as management said they would need the next quarter to clear out excess inventory. Executives promised a simplified product line and a focus on developing better software would improve the user experience and future results. Renewing a commitment to long term thinking, they also said they would no longer give quarterly guidance. Yahoo reported another lackluster quarter, and CEO Meyer announced her latest underwhelming turnaround plan. She confirmed reports that the board would review alternatives for the core internet business, but gave every indication that she is not in favor of the idea. On Friday, shares of LinkedIn traded down 40% after earnings and very weak guidance caused analysts reconsider their valuation of the stock.
Among the most notable earnings out this week were results from the global oil majors. BP's fourth-quarter earnings plunged 91% y/y, with its key "underlying replacement cost profit" metric falling to $196 million from $2.2 billion. For 2015, BP saw an annual loss of $5.2 billion compared with a profit of $8.1 billion a year earlier, worse than the $4.9 billion loss in 2010, when BP was battered with write-downs and charges related to the Gulf oil spill. Exxon's quarterly results were better than expected, although profits fell more than 50% y/y and revenue was down sharply. ConocoPhillips bent under balance sheet pressure, slashing its dividend by 66% after its net losses steepened dramatically on a y/y basis. Royal Dutch Shell saw its profits cut in half y/y, while revenue fell slightly less than 50%, although its preliminary report two weeks ago prepared markets for the slump. Norway's Statoil saw profits shrink 44% y/y.
In deal news, Abbott agreed to pay $56/share in cash to acquire over-the-counter testing kit firm, Alere. The offer represented a huge premium of more than 50% over Alere's prior closing stock price. The total deal is valued around $5.8 billion. Just two weeks after News Corp quashed rumors it was pursuing Twitter, new reports circulated that private equity firms were working on a deal to take Twitter private. Six months after Syngenta said no to a $47 billion takeover attempt from Monsanto, the Swiss ag firm has said yes to a $43 billion offer from state-owned China National Chemical Corporation. The transaction would be the largest acquisition of a foreign company by a Chinese business and the latest in a string of deals by the company, known as ChemChina.
Fri, 05 Feb 2016 16:09 PM EST
After two weeks of moves sideways or higher, most global equity markets resumed the downtrend seen in early January. The big exception was the suspiciously calm Shanghai Composite, which eked out a modest gain ahead of China's Lunar New Year holiday week and was much less volatile than in recent weeks. With central bank largess pacifying most of Europe and Asia, concern about the US played a central role. The dollar saw its biggest weekly decline against the index since 2009, while US treasuries rallied and the 10-year UST yield sank as low as 1.790% on Wednesday, its lowest level since last February and within half a percentage point of the record low of 1.380% seen in 2012. Analysts reoriented their forecasts on Fed policy moves, with many suggesting only one or two rate hikes may be possible this year. Lower interest rates slammed US banks, as shares of a raft of major US financials hit 52-week lows. Commodity prices broadly lifted outside of energy, on the outlook for lower rates allowing the beaten down global materials stocks to enjoy a modest rebound. Gold moved back above the 200-day moving average for the first time since November while the mining stocks saw big outperformance. Weak earnings results from many oil and tech names provided no relief and for the week the DJIA lost 1.6%, the S&P fell 1.3%, and the Nasdaq plunged 5.4%.
Markets recalibrated their outlook for Fed monetary policy this week, helping to weaken the greenback. In a note published on Tuesday, Goldman Sachs pushed its forecast for the next Fed interest rate hike out to June from March, and lowered its view for the number of increases this year to three from four. On Wednesday, New York Fed Governor Dudley acknowledged that conditions were worse now than they were in December when the FOMC delivered its first rate hike, but also stated the FOMC was not ready to draw very many conclusions about policy right now. Dudley's cautious comments about the strong dollar also helped momentum. The closely-watched dollar index fell more than 3% on the week and gave up all its gains since late October. EUR/USD climbed more than three big figures on the week - rising from 1.0850 to around 1.1200 - putting the dollar at its weakest level against the euro since last fall, when the ECB began hinting about additional QE measures and tanked the single currency.
Key US January data raised tough questions about the state of the domestic economy. The ISM manufacturing PMI remained in contraction territory for the third month in row, while the employment component dropped to its lowest level since June 2009 (45.9 vs 48.0). Services PMIs deteriorated, with the Markit reading dropping to its lowest point in the series in 27 months and the ISM data at its weakest since March 2014. The January US jobs report was a mixed bag: the nonfarm figure was +151K, well below expectations and the weakest total since the +149K gain in September, while the December nonfarm figure was revised down by 10% to 262K. On the other hand, unemployment declined to 4.9%, pushing the economy even closer to full employment. Hourly earnings were materially higher, giving the Fed some of the wage inflation it has been looking for.
Global interest rates descended after the Bank of Japan's move to negative interest rates late last week. Two-year yields fell to -0.5% in Germany and -0.2% in Japan, where the 10-year yield touched 0.025%. The sugar high felt by the yen wore off quickly, as USD/JPY dropped back to the 116-118 area it had been occupying in the weeks leading up to the BoJ decision, off the 121.50 area. BoJ Governor Kuroda spoke extensively about last week's decision, stating that just because negative rates were adopted it does not mean the bank is out of ammunition to expand asset buying. Kuroda said he is still concerned that inflation expectations will weaken in medium term, but for now saw the economy recovering moderately. He reiterated the BoJ is prepared to push further into negative rates, if necessary.
Crude prices were volatile this week, and despite the snapback on dollar weakness remained below last week's highs. Coming into the week, prices dipped on the weak China manufacturing numbers and a round of denials that an emergency OPEC meeting would be taking place. WTI sank around 11% to below $29.50 and Brent dropped 10% to $32.30 on Monday and Tuesday as hopes for coordinated production cuts were crushed. OPEC and Russia January production reports showed modest growth in output, further pressuring prices. Russia pumped the equivalent of 18.9M bpd, +1.5% y/y, a post-Soviet record. The plummeting dollar revived prices briefly, but both contracts were well off their highs as the week drew to a close, with Brent around $34/bbland WTI below $31/bbl.
After the market volatility last August and this January, China's FX reserve levels have become a point of concern for broader markets. The December data showed the biggest monthly decline on record in Chinese reserves. For 2015 overall, reserved declined $513B, the biggest annual drop ever. The January report drops over the weekend, and expectations are for another record drop by more than $100 billion, to a total of $3.2 trillion. While this number is almost unimaginably huge, some analysts suggested that markets would start to worry if the total dropped to $2.8 billion or less, as the PBoC could be forced to let the yuan slide lower with dramatic consequences. Needless to say, the softer dollar gave the Chinese breathing room in their struggle to manage the yuan this week.
The BoE's Monetary Policy Committee returned to unanimity for the first time since last July, voting 9-0 to keep interest rates on hold at record lows. McCafferty, the MPC's only real hawk, switched his vote to the majority and conceded to the data, noting that the pick-up in wage growth has been more muted than expected. And while the committee also cut its economic growth outlook over global growth concerns, it also stated that a rate hike would be more likely than not over the forecast period. At his press conference, Governor Carney said the committee did not discuss negative interest rates and reiterated that the whole MPC believes the next rate move likely higher, not lower. Cable leaped to one-month highs after the decision, testing briefly above 1.4650 before dropping to 1.4470 on Friday.
The Q4 earnings season is in full bloom but results have not been a boon for the equity markets. Results in the tech sector included some notable disappointments. GoPro sales bombed during the holiday quarter and guidance was even worse as management said they would need the next quarter to clear out excess inventory. Executives promised a simplified product line and a focus on developing better software would improve the user experience and future results. Renewing a commitment to long term thinking, they also said they would no longer give quarterly guidance. Yahoo reported another lackluster quarter, and CEO Meyer announced her latest underwhelming turnaround plan. She confirmed reports that the board would review alternatives for the core internet business, but gave every indication that she is not in favor of the idea. On Friday, shares of LinkedIn traded down 40% after earnings and very weak guidance caused analysts reconsider their valuation of the stock.
Among the most notable earnings out this week were results from the global oil majors. BP's fourth-quarter earnings plunged 91% y/y, with its key "underlying replacement cost profit" metric falling to $196 million from $2.2 billion. For 2015, BP saw an annual loss of $5.2 billion compared with a profit of $8.1 billion a year earlier, worse than the $4.9 billion loss in 2010, when BP was battered with write-downs and charges related to the Gulf oil spill. Exxon's quarterly results were better than expected, although profits fell more than 50% y/y and revenue was down sharply. ConocoPhillips bent under balance sheet pressure, slashing its dividend by 66% after its net losses steepened dramatically on a y/y basis. Royal Dutch Shell saw its profits cut in half y/y, while revenue fell slightly less than 50%, although its preliminary report two weeks ago prepared markets for the slump. Norway's Statoil saw profits shrink 44% y/y.
In deal news, Abbott agreed to pay $56/share in cash to acquire over-the-counter testing kit firm, Alere. The offer represented a huge premium of more than 50% over Alere's prior closing stock price. The total deal is valued around $5.8 billion. Just two weeks after News Corp quashed rumors it was pursuing Twitter, new reports circulated that private equity firms were working on a deal to take Twitter private. Six months after Syngenta said no to a $47 billion takeover attempt from Monsanto, the Swiss ag firm has said yes to a $43 billion offer from state-owned China National Chemical Corporation. The transaction would be the largest acquisition of a foreign company by a Chinese business and the latest in a string of deals by the company, known as ChemChina.
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