TradeTheNews.com Weekly
Market Update: China Fears Spoil the New Year
Fri, 08 Jan 2016 16:05 PM EST
Global stock markets experienced one of the worst first trading weeks of the
year ever, pummeled by China's ham-fisted attempts at stock market and currency
reform. The S&P500 ended the first five days of 2016 down by 6%, while the
DJIA erased 6.2% over the same period. Both the DJIA and the Nasdaq are now in
correction, 10 percent off their 2015 highs. Weak Chinese data and the PBoC's
attempts to shore up the economy by accelerating the devaluation of the yuan shuttered
Chinese equity trading twice, creating panicked reactions in various global
equity markets. Gold and government bond prices held up relatively well with
investors turning away from risk assets, but oil prices continued to sink.
The selloff got underway on Monday after Chinese regulators implemented new
circuit breaker rules for mainland equity markets, including a halt in trading
for the day if the index fell 7%. That morning, the official China December
manufacturing PMI dropped slightly to 49.7, marking its fifth month in
contraction, while the unofficial Caixin manufacturing PMI dropped to 48.2, for
its tenth month in contraction. The data gave traders the excuse they needed to
test the new rules, and the Shanghai Composite was halted after dropping by 7%
in afternoon trading. Shanghai appeared to stabilize somewhat on Tuesday and
Wednesday, then on Thursday it only took 29 minutes after the open of cash
equity trading for the Shanghai index to tank 7% and trigger the circuit
breaker. The yuan fixing was blamed for Thursday's slide.
For eight straight sessions through Thursday, the PBoC weakened its yuan
reference rate, dropping it to 6.5646 on Thursday, the weakest rate against the
dollar since March 2011. Thursday's fix was significantly weaker, -0.5% from
the prior day, the biggest margin of decline since the August devaluation. The
move prompted concerns that the central bank's continued efforts to weaken the
yuan will spur massive investment outflows from the mainland. The PBoC set the
rate a bit higher on Friday. There were unconfirmed reports that the PBoC
heavily intervened in markets throughout the week in an attempt to control the
declines in the yuan. China's defense of the yuan had managed to stabilize the
currency for almost four months following the notorious August devaluation,
although the effort led to the first-ever annual decline in the nation's FX
reserves, seen in data out on Thursday.
Traders dumped emerging market currencies while factoring the ramifications of
a weaker yuan. The Mexican Peso and South Africa Rand hit fresh lifetime lows
against the dollar. The Turkish Lira hit a three-month low and the Brazilian
Real gained a foothold above four to the USD while its close ties to the
Chinese economy were scrutinized. With oil trading in the low $30's and copper
testing 2.00/lb., other commodity-backed economies saw their currencies fare
very poorly as well. USD/CAD broke out above the 1.40 mark reaching levels not
seen in more than a decade. The Aussie Dollar fell roughly 3 big figures
against the Greenback to trade below 0.70 for the first time since early
October.
Relations between Saudi Arabia and Iran reached an all-time low after the
Saudis executed 47 militants, including Nimr al-Nimr, a Shiite cleric and
activist on behalf of the Shiite minority. Protests erupted in Iran and
throughout the Shiite world. In Tehran, a mob burned down the Saudi embassy,
leading Riyadh (and many of its Gulf allies) to cut diplomatic ties with Iran.
With crude at more than a decade low, the Saudi budget deficit hit an
unprecedented 15% of GDP, forcing the government to dip heavily into its
reserves. In response, the Saudis said they might attempt to IPO the state oil
company, Saudi Aramco. Analysts suggest that even if the Saudis sell a small stake,
the listing could easily surpass that of Alibaba, whose $25 billion IPO is the
largest on record. Aramco could be worth anything from $1 trillion to upwards
of $10 trillion, which would make it the most valuable company in the world by
a long shot.
WTI and Brent marched in lockstep from around $38 to test towards $32 on
Thursday afternoon. There was a brief move higher on Monday due to the
Saudi/Iran dustup, however the Gulf tension was no match for global market
turmoil. Traders ignored big drawdowns in the DoE and API crude inventory
reports, as well. After fears about China and emerging market growth, the
strong dollar appeared to be the other major catalyst holding down oil prices.
The greenback at its weakest remained above the low levels seen in November and
early December, however EUR/USD lunged back below 1.0750 early in the week,
marking one-month lows.
The US December jobs report was surprisingly strong, capping off a good year of
employment growth. Non-farm payrolls far exceeded expectations, rising by 292K
versus 200Ke. The blowout in the ADP report earlier in the week had hinted at a
good showing on Friday. Unemployment remains at 5%. Wages were the only sour
note in the report: average hourly earnings were flat in December compared to the
prior month and rose 2.5% against the prior year. Both numbers missed
expectations.
Automakers reported total industry sales of nearly 17.5 million for 2015, for
the industry's best sales year ever. Fiat and Ford reported December US sales
results that fell a bit short of expectations, while GM's December sales met
consensus estimates. Fiat and Ford also reported that total 2015 sales were the
best they'd seen in a decade. US-traded ADRs of Volkswagen sank sharply after
the US government filed a lawsuit seeking penalties as high as $80 billion -
more than the company is worth - and faulted the German carmaker for a lack of
progress fixing cars with rigged engines.
Shares of Apple were under pressure this week after press reports warned that
the company was expected to reduce the output of its iPhone 6s and 6s Plus
devices by about 30% between January and March. Apple was said to be cutting
back production in order to allow iPhone dealers to work their way through
inventories that have piled up at retailers in markets ranging from China and
Japan to Europe and the US amid lackluster sales. Several prominent firms cut
price targets and ratings on Apple in the wake of the reports. Then on
Thursday, Apple component suppliers Cirrus Logic and Qorvo cut their forecasts
for the current quarter.
In other tech news, the Consumer Electronics Show in Las Vegas took place this
week, with the usual assortment of flashy tech baubles on display. Smartwatches
got the main billing, with investors frowning on the new FitBit Blaze watch.
Amazon also got a great deal of attention for entering the semiconductor
business and selling its own branded chips to other companies.
In merger news, the big story was Shire getting very close to success in its
long-running pursuit of Baxalta. Back in August, Shire had proposed an
all-stock deal at around $45/share for Baxalta, valuing it around $30 billion.
Baxalta chose not to even enter negotiations back then, but this time around an
offer as high as $48/share with a cash component up to 40% of the deal appears
to have gotten their attention. ON Semiconductor got a new competitor in its
pursuit of Fairchild Semiconductor. China Resources Microelectronics Limited
offered $21.70/share, above ON Semi's $20/share bid, and Fairchild's board determined
it to be a superior offer.
Friday, January 8, 2016
Wednesday, January 6, 2016
January-February 2016 Outlook: A Long Time Ago, in a Financial Crisis Far, Far Away
TradeTheNews.com January-February
2016 Outlook: A Long Time Ago, in a Financial Crisis Far, Far Away
Wed, 06 Jan 2016 22:46 PM EST
It feels as if the 2008 financial crisis was a long time ago, and indeed it has now been the better part of a decade since the bottom fell out. More than seven years of CENTRAL BANK largesse has helped restore the global economy to modest growth but it continues to suffer from problems with low inflation.
The "dark side" of the economy still holds sway as evidenced by how 2015 went out with a whimper. The S&P500 dropped about 0.9% to snap a three year winning streak, and the Dow turned in its first losing year since 2008. Oil was pummeled for the second straight year, yet cheap energy prices have still shown little sign of trickling down into more consumer spending. Global terrorism has the world on edge as the depravity in Syria has inspired ruthless attacks far from the front lines in the Middle East.
The theme of global monetary policy divergence that has been theorized about for the last year finally materialized in December. The Federal Reserve followed through on rate liftoff last month, yet many questions remain about whether this divergence from global policy easing was prompted by a stronger economy or by the Fed backing itself into a corner with its rhetoric. Markets took the news of higher US rates even better than expected, with only a mild and brief bout of indigestion as the punch bowl was partially drained. Almost simultaneously, that bowl was replenished by other central banks. The ECB followed the script by expanding its QE program, though some market participants were disappointed that it grew only in breadth and timeframe, but not in the size of monthly purchases. To a lesser extent, the central banks of Japan and China also contributed new stimulus measures. And, as expected, oil prices continued to slide to multi-year lows as Saudi Arabia did not blink at the semi-annual OPEC meeting.
A period of market retrenchment is almost inevitable as the policies of central banks diverge - it's only a matter of when and how extreme the reaction is. The scope of the market rebalance could be determined in the next few months as forecasters refine their predictions for the shape of the Fed tightening cycle. To a large extent, Fed policy will be the force driving the global economy, as most market and policy movements will play off of how far the Fed pulls away from the global easing regime. The policy divergence will put new stresses on the global economy that will be observed in equities, fixed income, energy, and foreign exchange markets and in how other central banks rejigger their own policy strategies.
The Fed Awakens
After some months of hemming and hawing, the Fed went ahead with rate liftoff last month. By early December, the jobs numbers had solidified expectations that the Fed would make its first move toward normalization at its last meeting of the year. The decision was unanimously supported by FOMC voters, suggesting the doves and the hawks were able to reach a collegial consensus, though there may have been some added pressure to move since failing to do so risked the central bank's credibility after members had all but promised the first move would occur in 2015.
The new slate of FOMC voting members for 2016 has a decidedly more hawkish leaning, appropriate for a year in which rates are expected to rise. Cleveland's Loretta Mester (hawk), St. Louis' James Bullard (hawk), Kansas City's Ester George (hawk), and Boston's Eric Rosengren (moderate) will replace a more dovish group of Fed Presidents from last year. This new roster is not likely to shy away from rate hikes if conditions merit. If a dissenter does emerge, it might be either a hawkish George or dovish Rosengren. Back in 2013, the last time they were voting members, George dissented against prolonging the QE3 program on concerns it could spark inflation, while Rosengren later registered his opposition to the initial tapering of that program.
So the big question now is "when will they raise rates again?" Early indications from the Jedi Masters at the Fed have been that rates will rise slowly and will find a lower peak rate than in past tightening cycles. The first and most consistent guidance from Fed Chair Yellen has been that rate hikes will not be "mechanical." This means that rates moves will depend on the incoming data, and won't step higher at each successive meeting. Fed speakers have also used "gradual" to describe the expected rate path. One Fed president (Lockhart) has elaborated that gradual suggests a hike at every other meeting. These code words combined with the FOMC 'dot chart' have set the initial expectation that rates will be increased four times in 2016, to bring the key rate above 1.25% by the end of the year.
Since the Fed wants to be transparent as possible, the committee may deem it logical to provide a signal for the next raise one meeting in advance. Thus, an otherwise uneventful January meeting could still hold some intrigue should the Fed add language that sets up the sequel to rate liftoff in March.
PREDICTIONS: With the first move out of the way, the Fed must face the challenge of managing future rate expectations in a context of a global economic malaise that is forcing other central banks to add even more stimulus. If the Fed keeps pulling rates farther off of the zero bound while other central bank policy regimes are sinking below zero, the policy divergence could begin to have unintended consequences and create a backlash in markets.
The second rate hike now becomes all important to the policy schematic, and its timing will be hotly debated. So far it's penciled in for March, but it could be knocked off track by a number of potential events including a stock market swoon or negative developments in the global markets (which blocked Fed liftoff in September).
The key question for the Fed is whether members need to see continued improvement toward its dual mandate (jobs & inflation) before approving a second rate hike, or if they are prepared to keep raising rates until bad data stops them. Some forces believe the Fed will not be able to muster more than a couple of rate hikes this year, and the markets may actively try to test the Fed's resolve with stock market correction.
Though rate liftoff in December was framed as a vote of confidence in the economy, mixed data in recent weeks suggest that the US is hardly a bastion of strength even compared to the anemic global economy. Many forecasters expect US Q4 GDP will be subpar and even the Atlanta Fed has cut its GDPnow tracking estimate to as low as 0.7%. Lingering concerns about low inflation and the strong dollar could also leave the Fed extremely cautious. The uncertain start for markets in the New Year seems like a strong reminder that even the best laid plans often go awry, foreshadowing some difficulties ahead that could delay more Fed rate action until the spring.
"It's a Trap!"
So what might disrupt the Fed's plan of attack? A broad variety of developments could put new stresses on the economy and markets, raising questions about the viability of monetary policy divergence. These could range from a simple stock market correction as Q4 earnings reports come in, to falling energy prices sparking a high yield crisis.
It's almost universally agreed that global easing has inflated equities, so the Fed taking its foot off the gas could hamper stocks. Former Dallas Fed President recently asserted that the Fed deliberately front-loaded an enormous equity rally over six years and that he would not be surprised if the market goes through a period of digestion now as stimulus is lifted, and could see a 10-20% correction.
That prediction could be tested as some potentially unsettling corporate earnings reports start to roll in during mid-January (Alcoa unofficially kicks off earnings season on January 11). The warm weather in December wreaked havoc on many retailers who couldn't sell off large inventories of winter clothing during the holiday sales season.
There could also be trouble in store for Apple. 2016 is now expected to be the first year ever in which iPhone sales will shrink as the company's suppliers are tamping down iPhone production due to high existing inventories of the 6S handsets. If leading consumer brands like Apple can't get traction in the quarter, it does not bode well for other firms that are reliant on outsized holiday retail sales.
Fed tightening cycles generally lead to a pullback in equity indices, though the good news for bulls is that it's sometimes a year or two into the cycle before stocks peak. The fact that rates are coming off of historic lows and that their upward trajectory will be shallow should also ease the blow. And at least one sector - the big commercial banks - should start to see better returns as rates rise after years of making their organizations leaner.
The energy sector was the biggest drag on stocks last year and conditions could get worse for these companies in early 2016. Smaller energy services firms without the resources of an ExxonMobil have been struggling to right-size their businesses and their dividends to cope with the downturn in oil prices. Oversupply issues could continue to plague the oil market for a long time to come, so crude prices could go lower still. Demand for energy has risen, too, but not enough to overcome the crude glut, and there are now even some concerns that storage at the Cushing crossroads could eventually fill to capacity (Cushing storage is at record highs near 64 million barrels, edging closer to its 71 million barrel capacity).
The geopolitics of the Middle East always bear close attention, and more so than ever as relations between Saudi Arabia and Iran have reached an all-time low in recent days. In response to the Saudis execution of a popular Shiite cleric on terrorism charges, the Iranian government allowed protestors to ransack the Saudi embassy in Tehran. The Saudis, who are already embroiled in proxy wars with Iran in Syria and Yemen, then decided to cut off all commercial and diplomatic relations. A direct confrontation between the two is highly unlikely, but the heightened tensions could lead oil speculators to push Brent crude a bit higher. On the other hand, this latest clash might steel Saudi's resolve to continue oil production at full tilt to hurt Iran just as it works to bring more supply back to market as nuclear sanctions are lifted.
The collapse of oil prices has also bedeviled the junk bond market. Many smaller oil firms issued significant amounts of high yield debt to fund their growing operations during the shale oil boom, but the reversal in energy prices has raised concerns about default on those debts. As oil prices stretched to multi-year lows in December, the high yield market was hit by news that Third Avenue Management, a large mutual fund specializing in high-yield bonds, was liquidating the fund and had blocked investors from withdrawing money as it wound down. Jitters over Third Avenue lasted only a couple of sessions but some powerful voices in the markets such as Carl Icahn suggested it was another sign that a long-prophesied high yield debt meltdown could be underway. For the high yield market, each step higher in Fed rates could become the straw that breaks the camel's back as yield-starved investors who packed into junk bonds start seeing better and safer opportunities in more conventional instruments.
PREDICTIONS: The crucial Q4 earnings season will tell the true tale of how the holidays played out for retailers and other seasonally impacted businesses. So far, lower gasoline prices have not translated into any noticeable rise in economic activity, but perhaps the November-December shopping period got a small boost.
The Fed has made it clear that it worries about stock market performance, and the market may decide to test the central bank's resolve early this year. The old saying "as January goes so goes the market" holds true about 70% of the time, so a poor performance in the next few weeks could bode poorly for the year.
Stock prices remain intertwined with the energy market, and no relief is in sight on the supply side. Iran and Saudi have had a long rocky relationship as the centers of their rival branches of Islam, but they don't appear to be ready to spill blood over oil. When Iran turns the spigots back on it may be forced to ramp up oil exports only gradually to avoid further price erosion.
May the Forex Be With You
It was China that got 2016 off to a rocky start. New stock market circuit breakers were tested on the very first trading day of the New Year as Shanghai and Shenzhen equity indices tumbled 7%.
The first economic data point of the year was another disappointing industrial reading: the December Caixin PMI Manufacturing number missed estimates and registered its tenth straight month of contraction. On top of that, forex watchers noted with concern that the PBoC fixed the yuan to its weakest level in five years.
Since the PBoC shocked the FX market with a sudden 4% devaluation last summer, it has steadily weakened the currency fixing. In the New Year this has begun to shake confidence in the Chinese economy. The concern is that the PBoC may overuse the currency as a tool for stimulating its weakened economy. If China allows its currency to depreciate further it could make large amounts of dollar denominated debt held by state owned companies harder to repay.
Some of the early equity weakness may also be linked to a ban on large shareholders selling stakes in Chinese firms that regulators put in place to reinforce the stock market last July. That six month ban on insider sales will soon expire (January 8th) and some traders may be front running expectations that large shareholders will be eager to sell.
It's not a pretty picture in Europe either, where the ECB was forced to supplement its stimulus program last month, magnifying the policy divergence with the tightening Fed. The ECB cut its deposit rate another ten basis points into negative territory, to -0.30% and expanded its QE program. The bond buying program was extended by six months to March 2017 and expanded to including regional government bonds, widening the variety of assets that can be bought. Markets were apparently disappointed that the ECB failed to boost the monthly purchase size of €60 billion, but ECB President Draghi defended the measures taken as "adequate." In addition, he explained they would also commence reinvesting principal as bonds mature, a move that would add €680 billion in liquidity to the system by 2019.
Despite assurances from Draghi that more monetary stimulus is possible, there is some speculation that the ECB council is near its limit. A recent poll conducted by the Financial Times found that many experts don't believe the ECB has the wherewithal to increase the asset purchase program again. The December decision to extend the QE program drew five dissenters, including representatives from Germany, Netherlands, Estonia, and Latvia. The minutes of the December meeting to be released on January 14th will amplify that this growing rebel faction is unhappy with the snowballing amount of accommodation. This could relegate further jawboning by Draghi to the status of an ineffectual Jedi mind trick.
Some smaller central banks are having difficulties coping with the stresses created by grand schemes of the major central banks. For example, Sweden's Riksbank threw down the gauntlet at an emergency meeting on January 4th. The Riksbank said that the Krona's appreciation is a threat to its efforts to return inflation to its 2% target. To that end, Swedish officials said they stand ready to intervene in the FX market without notice, and could take other measures including extending QE or making indirect loans to companies if needed.
Monetary policy regimes at many other foreign central banks required some quick adjustments after the Fed rate liftoff. Almost immediately, several Latin American central banks that are closely aligned to Fed policy, like Mexico's, raised rates to discourage depreciation of their local currencies. They may be compelled to mirror additional Fed moves.
PREDICTIONS: After smart money predictions of EUR/USD parity in 2015 were dashed, forecasts are more varied in the New Year. Some banks including Citigroup expect four Fed rate hikes to create enough policy divergence to foster euro parity by the end of this year. Other analysts are less optimistic about the US outlook and think some of the dollar strength is speculative froth. They see the ECB growing less tolerant of additional easing, and predict fewer rate hikes from a cautious Fed, which could actually lead to a modest strengthening of the euro.
The dollar index rose more than 9% during 2015 on the run up to rate liftoff, so some of the strength is already baked in, but higher US yields will act as a magnet for funds from abroad and that should result in sustained strength for the greenback. So as the Fed continues to raise rates it's likely to further strengthen the dollar against major currency pairs.
Despite the Treasury's oft repeated mantra that a strong dollar is in the interest of the US, in some cases it isn't. If the dollar gets even stronger there could be an outcry from large US firms, given that a large chunk of their earnings comes from exports and currency headwinds are already hurting business.
A stronger dollar could also have negative spillover effects in emerging markets, where corporate debt has increasingly been dollar-denominated. As that debt becomes more expensive in local currencies, it could ratchet up financial stresses. Meanwhile, the PBoC will likely content itself with slowly dropping the value of the yuan, since another large, sudden devaluation could create a panic.
Pol Wars
As the rhetoric heats up on the Presidential campaign trail, cooler heads have prevailed in Washington. Congress and the White House signed off on a two year budget and debt limit increase that gives the government authority to borrow freely through March 2017. This averts the threat of a government shutdown during the Presidential campaign, and may allow the Congress to work quietly on smaller issues during Obama's lame duck year.
The campaign for the White House will soon kick into hyper-drive now that the voting is about to begin. A year of wild stump speeches and unruly debates will culminate in actual voting starting on February 1st at the Iowa Caucus.
On the Democratic side Bernie Sanders has energized many liberals and he may pull off a victory in New Hampshire, but his rebel campaign is unlikely to overthrow the Hillary Clinton juggernaut. Meanwhile, there is a great disturbance in the Republican side of the field. Donald Trump, who has led in most GOP polls almost since he launched his bid in June, has confounded pundits who keep predicting his campaign will blow up more spectacularly than the Death Star. But despite some controversial statements and the disdain of the party establishment, Trump still has a full head of steam going into the Primaries. Thus, he will get a chance to prove whether or not his base of disillusioned Republicans will actually pull the lever for his name.
Trump fended off an autumn surge in the polls by Ben Carson, who seems to have all but vanished from the race, but now a new challenger is rising in the form of Ted Cruz. With the backing of evangelicals Cruz could win the Iowa Caucus and gain some momentum headed into the next primary states (New Hampshire Feb 9th, followed by South Carolina and Nevada a couple weeks later, and then Super Tuesday on March 1st). It is hard to believe that a political "padawan" like Trump could lead the GOP race from wire to wire, and if The Donald's fan boys don't get out to the polls then Cruz might assume the mantle of the "outsider" candidate.
It's well known that Mr. Cruz thrives on thumbing his nose at the establishment wing of the party (making him the most despised figure within a legislative body since Jar Jar Binks). Many political observers are betting that Cruz and the radical Republicans will ultimately face off with Marco Rubio who is leading the pack of more traditional candidates that are palatable to the establishment wing.
In Europe, the inconclusive election in Spain has yet to produce a new government. With opposition parties apparently unwilling to form a coalition, it appears that Madrid is on its way to establishing a minority government later this month. Portugal's presidential election on January 24th is expected to have a more certain result. The center right Social Democratic Party is expected to hold on to power as President Silva steps down.
PREDICTIONS: By the end of March, the US Presidential field should be weeded out considerably. The congested GOP side might even be ready to ordain Trump, Cruz, or Rubio as their champion (or less likely, Chris Christie or Jeb Bush could make a late surge). But it might not go smoothly. The Republican Party was embarrassed last year when a report emerged that they were considering the possibility of a brokered convention if no single candidate could grab a majority of delegates.
If the Republican Party can't coalesce around a credible candidate in the next few months, it could damage the chances of the eventual nominee in the general election. Four more years of a Democratic President dueling with a Republican Congress promises another long stretch of brutal gridlock in Washington.
Border security has become a prominent issue in the face of global terrorism that touched Paris and California late last year. The unfortunate occurrence of any further terrorist incidents could weaken the incumbent party as scared voters could flock to a candidate that promises to make them safer from the phantom menace, helping Republicans in the US and nationalist parties in Europe.
CALENDAR
JANUARY
4: German Prelim CPI; UK Manufacturing PMI; US ISM Manufacturing PMI; China Caixin Manufacturing PMI; Puerto Rico $1B debt payments due
5: Euro Zone Flash CPI Estimate
6: UK Services PMI; US ISM Non-Manufacturing PMI; US ADP Employment; US Trade Balance; US Factory Orders; FOMC Minutes; China Caixin Services PMI
7: German Factory Orders; Euro Zone Unemployment
8: US Payrolls & Unemployment; China CPI & PPI
11: US JOLTS Job Openings; Alcoa earnings report (unofficial start of earnings season)
12: UK Manufacturing Production; China Trade Balance
13:
14: ECB Minutes; BOE policy decision
15: US Retail Sales; US PPI; US Industrial Production; Prelim University of Michigan Consumer Sentiment
18: US Markets Closed for Martin Luther King Day
19: UK CPI; German ZEW Economic Sentiment; China Q4 GDP; China Industrial Production
20: UK Claimant Count & Unemployment; US Housing Starts & Building Permits; US CPI
21: Various EU Flash Services & Manufacturing PMIs; Euro Zone Final CPI; ECB Policy Decision & Press Conference; US Philly Fed Manufacturing
22: UK Retail Sales; US Existing Home Sales
24: Portugal presidential election (second round Feb 14th if needed)
25: German Ifo Business Climate
26: US Consumer Confidence
27: US New Home Sales; FOMC Policy Decision (no press conf)
28: German Prelim CPI; UK Prelim Q4 GDP; US Durable Goods Orders
29: Euro Zone Flash CPI Estimate; US Advance Q4 GDP; Chicago PMI
31: China Manufacturing & Non-Manufacturing PMIs
FEBRUARY
1: UK Manufacturing PMI; US ISM Manufacturing PMI; US Personal Spending; Iowa Caucus; China Caixin Manufacturing PMI
2: Euro Zone Unemployment
3: UK Services PMI; US ADP Employment; US ISM Non-Manufacturing PMI; China Caixin Services PMI
4: BOE Policy Decision & Inflation Report; US Factory Orders
5: German Factory Orders; US Payrolls & Unemployment; US Trade Balance
7: China Trade Balance
8:
9: US JOLTS Job Openings; China CPI & PPI; New Hampshire Primary
10: UK Manufacturing Production
11:
12: Euro Zone Flash Q4 GDP; US Retail Sales; Prelim University of Michigan Consumer Sentiment
15:
16: UK CPI; German ZEW Economic Sentiment
17: UK Claimant Count & Unemployment; US Housing Starts & Building Permits; US PPI; US Industrial Production; FOMC Minutes
18: ECB Minutes; US Philly Fed Manufacturing
19: UK Retail Sales; US CPI
20: Nevada Dem Caucus; South Carolina GOP Primary
22: Various EU Flash Services & Manufacturing PMIs;
23: German Ifo Business Climate; UK Inflation Report hearings; US Consumer Confidence; US Existing Home Sales; Nevada GOP Caucus
24: US New Home Sales; Q4 Mortgage Delinquencies
25: UK Q4 GDP Second Estimate; Euro Zone Final CPI; US Durable Goods
26: German Prelim CPI; US Prelim Q4 GDP (second estimate); US Personal Spending
27: South Carolina Dem Primary
29: Euro Zone CPI Flash Estimate; Chicago PMI; China Manufacturing & Non-Manufacturing PMIs
MARCH
1: UK Manufacturing PMI; Euro Zone Unemployment; US ISM Manufacturing; China Caixin Manufacturing; Super Tuesday Primaries & Caucuses in 12 states (AL, AK, AR, CO, GA, MA, MN, OK, TN, TX, VT, VA)
2: US ADP Employment Change
3: US ISM Non-manufacturing PMI; US Factory Orders; China Caixin Services PMI
4: US Payrolls & Unemployment; US Trade Balance
Wed, 06 Jan 2016 22:46 PM EST
It feels as if the 2008 financial crisis was a long time ago, and indeed it has now been the better part of a decade since the bottom fell out. More than seven years of CENTRAL BANK largesse has helped restore the global economy to modest growth but it continues to suffer from problems with low inflation.
The "dark side" of the economy still holds sway as evidenced by how 2015 went out with a whimper. The S&P500 dropped about 0.9% to snap a three year winning streak, and the Dow turned in its first losing year since 2008. Oil was pummeled for the second straight year, yet cheap energy prices have still shown little sign of trickling down into more consumer spending. Global terrorism has the world on edge as the depravity in Syria has inspired ruthless attacks far from the front lines in the Middle East.
The theme of global monetary policy divergence that has been theorized about for the last year finally materialized in December. The Federal Reserve followed through on rate liftoff last month, yet many questions remain about whether this divergence from global policy easing was prompted by a stronger economy or by the Fed backing itself into a corner with its rhetoric. Markets took the news of higher US rates even better than expected, with only a mild and brief bout of indigestion as the punch bowl was partially drained. Almost simultaneously, that bowl was replenished by other central banks. The ECB followed the script by expanding its QE program, though some market participants were disappointed that it grew only in breadth and timeframe, but not in the size of monthly purchases. To a lesser extent, the central banks of Japan and China also contributed new stimulus measures. And, as expected, oil prices continued to slide to multi-year lows as Saudi Arabia did not blink at the semi-annual OPEC meeting.
A period of market retrenchment is almost inevitable as the policies of central banks diverge - it's only a matter of when and how extreme the reaction is. The scope of the market rebalance could be determined in the next few months as forecasters refine their predictions for the shape of the Fed tightening cycle. To a large extent, Fed policy will be the force driving the global economy, as most market and policy movements will play off of how far the Fed pulls away from the global easing regime. The policy divergence will put new stresses on the global economy that will be observed in equities, fixed income, energy, and foreign exchange markets and in how other central banks rejigger their own policy strategies.
The Fed Awakens
After some months of hemming and hawing, the Fed went ahead with rate liftoff last month. By early December, the jobs numbers had solidified expectations that the Fed would make its first move toward normalization at its last meeting of the year. The decision was unanimously supported by FOMC voters, suggesting the doves and the hawks were able to reach a collegial consensus, though there may have been some added pressure to move since failing to do so risked the central bank's credibility after members had all but promised the first move would occur in 2015.
The new slate of FOMC voting members for 2016 has a decidedly more hawkish leaning, appropriate for a year in which rates are expected to rise. Cleveland's Loretta Mester (hawk), St. Louis' James Bullard (hawk), Kansas City's Ester George (hawk), and Boston's Eric Rosengren (moderate) will replace a more dovish group of Fed Presidents from last year. This new roster is not likely to shy away from rate hikes if conditions merit. If a dissenter does emerge, it might be either a hawkish George or dovish Rosengren. Back in 2013, the last time they were voting members, George dissented against prolonging the QE3 program on concerns it could spark inflation, while Rosengren later registered his opposition to the initial tapering of that program.
So the big question now is "when will they raise rates again?" Early indications from the Jedi Masters at the Fed have been that rates will rise slowly and will find a lower peak rate than in past tightening cycles. The first and most consistent guidance from Fed Chair Yellen has been that rate hikes will not be "mechanical." This means that rates moves will depend on the incoming data, and won't step higher at each successive meeting. Fed speakers have also used "gradual" to describe the expected rate path. One Fed president (Lockhart) has elaborated that gradual suggests a hike at every other meeting. These code words combined with the FOMC 'dot chart' have set the initial expectation that rates will be increased four times in 2016, to bring the key rate above 1.25% by the end of the year.
Since the Fed wants to be transparent as possible, the committee may deem it logical to provide a signal for the next raise one meeting in advance. Thus, an otherwise uneventful January meeting could still hold some intrigue should the Fed add language that sets up the sequel to rate liftoff in March.
PREDICTIONS: With the first move out of the way, the Fed must face the challenge of managing future rate expectations in a context of a global economic malaise that is forcing other central banks to add even more stimulus. If the Fed keeps pulling rates farther off of the zero bound while other central bank policy regimes are sinking below zero, the policy divergence could begin to have unintended consequences and create a backlash in markets.
The second rate hike now becomes all important to the policy schematic, and its timing will be hotly debated. So far it's penciled in for March, but it could be knocked off track by a number of potential events including a stock market swoon or negative developments in the global markets (which blocked Fed liftoff in September).
The key question for the Fed is whether members need to see continued improvement toward its dual mandate (jobs & inflation) before approving a second rate hike, or if they are prepared to keep raising rates until bad data stops them. Some forces believe the Fed will not be able to muster more than a couple of rate hikes this year, and the markets may actively try to test the Fed's resolve with stock market correction.
Though rate liftoff in December was framed as a vote of confidence in the economy, mixed data in recent weeks suggest that the US is hardly a bastion of strength even compared to the anemic global economy. Many forecasters expect US Q4 GDP will be subpar and even the Atlanta Fed has cut its GDPnow tracking estimate to as low as 0.7%. Lingering concerns about low inflation and the strong dollar could also leave the Fed extremely cautious. The uncertain start for markets in the New Year seems like a strong reminder that even the best laid plans often go awry, foreshadowing some difficulties ahead that could delay more Fed rate action until the spring.
"It's a Trap!"
So what might disrupt the Fed's plan of attack? A broad variety of developments could put new stresses on the economy and markets, raising questions about the viability of monetary policy divergence. These could range from a simple stock market correction as Q4 earnings reports come in, to falling energy prices sparking a high yield crisis.
It's almost universally agreed that global easing has inflated equities, so the Fed taking its foot off the gas could hamper stocks. Former Dallas Fed President recently asserted that the Fed deliberately front-loaded an enormous equity rally over six years and that he would not be surprised if the market goes through a period of digestion now as stimulus is lifted, and could see a 10-20% correction.
That prediction could be tested as some potentially unsettling corporate earnings reports start to roll in during mid-January (Alcoa unofficially kicks off earnings season on January 11). The warm weather in December wreaked havoc on many retailers who couldn't sell off large inventories of winter clothing during the holiday sales season.
There could also be trouble in store for Apple. 2016 is now expected to be the first year ever in which iPhone sales will shrink as the company's suppliers are tamping down iPhone production due to high existing inventories of the 6S handsets. If leading consumer brands like Apple can't get traction in the quarter, it does not bode well for other firms that are reliant on outsized holiday retail sales.
Fed tightening cycles generally lead to a pullback in equity indices, though the good news for bulls is that it's sometimes a year or two into the cycle before stocks peak. The fact that rates are coming off of historic lows and that their upward trajectory will be shallow should also ease the blow. And at least one sector - the big commercial banks - should start to see better returns as rates rise after years of making their organizations leaner.
The energy sector was the biggest drag on stocks last year and conditions could get worse for these companies in early 2016. Smaller energy services firms without the resources of an ExxonMobil have been struggling to right-size their businesses and their dividends to cope with the downturn in oil prices. Oversupply issues could continue to plague the oil market for a long time to come, so crude prices could go lower still. Demand for energy has risen, too, but not enough to overcome the crude glut, and there are now even some concerns that storage at the Cushing crossroads could eventually fill to capacity (Cushing storage is at record highs near 64 million barrels, edging closer to its 71 million barrel capacity).
The geopolitics of the Middle East always bear close attention, and more so than ever as relations between Saudi Arabia and Iran have reached an all-time low in recent days. In response to the Saudis execution of a popular Shiite cleric on terrorism charges, the Iranian government allowed protestors to ransack the Saudi embassy in Tehran. The Saudis, who are already embroiled in proxy wars with Iran in Syria and Yemen, then decided to cut off all commercial and diplomatic relations. A direct confrontation between the two is highly unlikely, but the heightened tensions could lead oil speculators to push Brent crude a bit higher. On the other hand, this latest clash might steel Saudi's resolve to continue oil production at full tilt to hurt Iran just as it works to bring more supply back to market as nuclear sanctions are lifted.
The collapse of oil prices has also bedeviled the junk bond market. Many smaller oil firms issued significant amounts of high yield debt to fund their growing operations during the shale oil boom, but the reversal in energy prices has raised concerns about default on those debts. As oil prices stretched to multi-year lows in December, the high yield market was hit by news that Third Avenue Management, a large mutual fund specializing in high-yield bonds, was liquidating the fund and had blocked investors from withdrawing money as it wound down. Jitters over Third Avenue lasted only a couple of sessions but some powerful voices in the markets such as Carl Icahn suggested it was another sign that a long-prophesied high yield debt meltdown could be underway. For the high yield market, each step higher in Fed rates could become the straw that breaks the camel's back as yield-starved investors who packed into junk bonds start seeing better and safer opportunities in more conventional instruments.
PREDICTIONS: The crucial Q4 earnings season will tell the true tale of how the holidays played out for retailers and other seasonally impacted businesses. So far, lower gasoline prices have not translated into any noticeable rise in economic activity, but perhaps the November-December shopping period got a small boost.
The Fed has made it clear that it worries about stock market performance, and the market may decide to test the central bank's resolve early this year. The old saying "as January goes so goes the market" holds true about 70% of the time, so a poor performance in the next few weeks could bode poorly for the year.
Stock prices remain intertwined with the energy market, and no relief is in sight on the supply side. Iran and Saudi have had a long rocky relationship as the centers of their rival branches of Islam, but they don't appear to be ready to spill blood over oil. When Iran turns the spigots back on it may be forced to ramp up oil exports only gradually to avoid further price erosion.
May the Forex Be With You
It was China that got 2016 off to a rocky start. New stock market circuit breakers were tested on the very first trading day of the New Year as Shanghai and Shenzhen equity indices tumbled 7%.
The first economic data point of the year was another disappointing industrial reading: the December Caixin PMI Manufacturing number missed estimates and registered its tenth straight month of contraction. On top of that, forex watchers noted with concern that the PBoC fixed the yuan to its weakest level in five years.
Since the PBoC shocked the FX market with a sudden 4% devaluation last summer, it has steadily weakened the currency fixing. In the New Year this has begun to shake confidence in the Chinese economy. The concern is that the PBoC may overuse the currency as a tool for stimulating its weakened economy. If China allows its currency to depreciate further it could make large amounts of dollar denominated debt held by state owned companies harder to repay.
Some of the early equity weakness may also be linked to a ban on large shareholders selling stakes in Chinese firms that regulators put in place to reinforce the stock market last July. That six month ban on insider sales will soon expire (January 8th) and some traders may be front running expectations that large shareholders will be eager to sell.
It's not a pretty picture in Europe either, where the ECB was forced to supplement its stimulus program last month, magnifying the policy divergence with the tightening Fed. The ECB cut its deposit rate another ten basis points into negative territory, to -0.30% and expanded its QE program. The bond buying program was extended by six months to March 2017 and expanded to including regional government bonds, widening the variety of assets that can be bought. Markets were apparently disappointed that the ECB failed to boost the monthly purchase size of €60 billion, but ECB President Draghi defended the measures taken as "adequate." In addition, he explained they would also commence reinvesting principal as bonds mature, a move that would add €680 billion in liquidity to the system by 2019.
Despite assurances from Draghi that more monetary stimulus is possible, there is some speculation that the ECB council is near its limit. A recent poll conducted by the Financial Times found that many experts don't believe the ECB has the wherewithal to increase the asset purchase program again. The December decision to extend the QE program drew five dissenters, including representatives from Germany, Netherlands, Estonia, and Latvia. The minutes of the December meeting to be released on January 14th will amplify that this growing rebel faction is unhappy with the snowballing amount of accommodation. This could relegate further jawboning by Draghi to the status of an ineffectual Jedi mind trick.
Some smaller central banks are having difficulties coping with the stresses created by grand schemes of the major central banks. For example, Sweden's Riksbank threw down the gauntlet at an emergency meeting on January 4th. The Riksbank said that the Krona's appreciation is a threat to its efforts to return inflation to its 2% target. To that end, Swedish officials said they stand ready to intervene in the FX market without notice, and could take other measures including extending QE or making indirect loans to companies if needed.
Monetary policy regimes at many other foreign central banks required some quick adjustments after the Fed rate liftoff. Almost immediately, several Latin American central banks that are closely aligned to Fed policy, like Mexico's, raised rates to discourage depreciation of their local currencies. They may be compelled to mirror additional Fed moves.
PREDICTIONS: After smart money predictions of EUR/USD parity in 2015 were dashed, forecasts are more varied in the New Year. Some banks including Citigroup expect four Fed rate hikes to create enough policy divergence to foster euro parity by the end of this year. Other analysts are less optimistic about the US outlook and think some of the dollar strength is speculative froth. They see the ECB growing less tolerant of additional easing, and predict fewer rate hikes from a cautious Fed, which could actually lead to a modest strengthening of the euro.
The dollar index rose more than 9% during 2015 on the run up to rate liftoff, so some of the strength is already baked in, but higher US yields will act as a magnet for funds from abroad and that should result in sustained strength for the greenback. So as the Fed continues to raise rates it's likely to further strengthen the dollar against major currency pairs.
Despite the Treasury's oft repeated mantra that a strong dollar is in the interest of the US, in some cases it isn't. If the dollar gets even stronger there could be an outcry from large US firms, given that a large chunk of their earnings comes from exports and currency headwinds are already hurting business.
A stronger dollar could also have negative spillover effects in emerging markets, where corporate debt has increasingly been dollar-denominated. As that debt becomes more expensive in local currencies, it could ratchet up financial stresses. Meanwhile, the PBoC will likely content itself with slowly dropping the value of the yuan, since another large, sudden devaluation could create a panic.
Pol Wars
As the rhetoric heats up on the Presidential campaign trail, cooler heads have prevailed in Washington. Congress and the White House signed off on a two year budget and debt limit increase that gives the government authority to borrow freely through March 2017. This averts the threat of a government shutdown during the Presidential campaign, and may allow the Congress to work quietly on smaller issues during Obama's lame duck year.
The campaign for the White House will soon kick into hyper-drive now that the voting is about to begin. A year of wild stump speeches and unruly debates will culminate in actual voting starting on February 1st at the Iowa Caucus.
On the Democratic side Bernie Sanders has energized many liberals and he may pull off a victory in New Hampshire, but his rebel campaign is unlikely to overthrow the Hillary Clinton juggernaut. Meanwhile, there is a great disturbance in the Republican side of the field. Donald Trump, who has led in most GOP polls almost since he launched his bid in June, has confounded pundits who keep predicting his campaign will blow up more spectacularly than the Death Star. But despite some controversial statements and the disdain of the party establishment, Trump still has a full head of steam going into the Primaries. Thus, he will get a chance to prove whether or not his base of disillusioned Republicans will actually pull the lever for his name.
Trump fended off an autumn surge in the polls by Ben Carson, who seems to have all but vanished from the race, but now a new challenger is rising in the form of Ted Cruz. With the backing of evangelicals Cruz could win the Iowa Caucus and gain some momentum headed into the next primary states (New Hampshire Feb 9th, followed by South Carolina and Nevada a couple weeks later, and then Super Tuesday on March 1st). It is hard to believe that a political "padawan" like Trump could lead the GOP race from wire to wire, and if The Donald's fan boys don't get out to the polls then Cruz might assume the mantle of the "outsider" candidate.
It's well known that Mr. Cruz thrives on thumbing his nose at the establishment wing of the party (making him the most despised figure within a legislative body since Jar Jar Binks). Many political observers are betting that Cruz and the radical Republicans will ultimately face off with Marco Rubio who is leading the pack of more traditional candidates that are palatable to the establishment wing.
In Europe, the inconclusive election in Spain has yet to produce a new government. With opposition parties apparently unwilling to form a coalition, it appears that Madrid is on its way to establishing a minority government later this month. Portugal's presidential election on January 24th is expected to have a more certain result. The center right Social Democratic Party is expected to hold on to power as President Silva steps down.
PREDICTIONS: By the end of March, the US Presidential field should be weeded out considerably. The congested GOP side might even be ready to ordain Trump, Cruz, or Rubio as their champion (or less likely, Chris Christie or Jeb Bush could make a late surge). But it might not go smoothly. The Republican Party was embarrassed last year when a report emerged that they were considering the possibility of a brokered convention if no single candidate could grab a majority of delegates.
If the Republican Party can't coalesce around a credible candidate in the next few months, it could damage the chances of the eventual nominee in the general election. Four more years of a Democratic President dueling with a Republican Congress promises another long stretch of brutal gridlock in Washington.
Border security has become a prominent issue in the face of global terrorism that touched Paris and California late last year. The unfortunate occurrence of any further terrorist incidents could weaken the incumbent party as scared voters could flock to a candidate that promises to make them safer from the phantom menace, helping Republicans in the US and nationalist parties in Europe.
CALENDAR
JANUARY
4: German Prelim CPI; UK Manufacturing PMI; US ISM Manufacturing PMI; China Caixin Manufacturing PMI; Puerto Rico $1B debt payments due
5: Euro Zone Flash CPI Estimate
6: UK Services PMI; US ISM Non-Manufacturing PMI; US ADP Employment; US Trade Balance; US Factory Orders; FOMC Minutes; China Caixin Services PMI
7: German Factory Orders; Euro Zone Unemployment
8: US Payrolls & Unemployment; China CPI & PPI
11: US JOLTS Job Openings; Alcoa earnings report (unofficial start of earnings season)
12: UK Manufacturing Production; China Trade Balance
13:
14: ECB Minutes; BOE policy decision
15: US Retail Sales; US PPI; US Industrial Production; Prelim University of Michigan Consumer Sentiment
18: US Markets Closed for Martin Luther King Day
19: UK CPI; German ZEW Economic Sentiment; China Q4 GDP; China Industrial Production
20: UK Claimant Count & Unemployment; US Housing Starts & Building Permits; US CPI
21: Various EU Flash Services & Manufacturing PMIs; Euro Zone Final CPI; ECB Policy Decision & Press Conference; US Philly Fed Manufacturing
22: UK Retail Sales; US Existing Home Sales
24: Portugal presidential election (second round Feb 14th if needed)
25: German Ifo Business Climate
26: US Consumer Confidence
27: US New Home Sales; FOMC Policy Decision (no press conf)
28: German Prelim CPI; UK Prelim Q4 GDP; US Durable Goods Orders
29: Euro Zone Flash CPI Estimate; US Advance Q4 GDP; Chicago PMI
31: China Manufacturing & Non-Manufacturing PMIs
FEBRUARY
1: UK Manufacturing PMI; US ISM Manufacturing PMI; US Personal Spending; Iowa Caucus; China Caixin Manufacturing PMI
2: Euro Zone Unemployment
3: UK Services PMI; US ADP Employment; US ISM Non-Manufacturing PMI; China Caixin Services PMI
4: BOE Policy Decision & Inflation Report; US Factory Orders
5: German Factory Orders; US Payrolls & Unemployment; US Trade Balance
7: China Trade Balance
8:
9: US JOLTS Job Openings; China CPI & PPI; New Hampshire Primary
10: UK Manufacturing Production
11:
12: Euro Zone Flash Q4 GDP; US Retail Sales; Prelim University of Michigan Consumer Sentiment
15:
16: UK CPI; German ZEW Economic Sentiment
17: UK Claimant Count & Unemployment; US Housing Starts & Building Permits; US PPI; US Industrial Production; FOMC Minutes
18: ECB Minutes; US Philly Fed Manufacturing
19: UK Retail Sales; US CPI
20: Nevada Dem Caucus; South Carolina GOP Primary
22: Various EU Flash Services & Manufacturing PMIs;
23: German Ifo Business Climate; UK Inflation Report hearings; US Consumer Confidence; US Existing Home Sales; Nevada GOP Caucus
24: US New Home Sales; Q4 Mortgage Delinquencies
25: UK Q4 GDP Second Estimate; Euro Zone Final CPI; US Durable Goods
26: German Prelim CPI; US Prelim Q4 GDP (second estimate); US Personal Spending
27: South Carolina Dem Primary
29: Euro Zone CPI Flash Estimate; Chicago PMI; China Manufacturing & Non-Manufacturing PMIs
MARCH
1: UK Manufacturing PMI; Euro Zone Unemployment; US ISM Manufacturing; China Caixin Manufacturing; Super Tuesday Primaries & Caucuses in 12 states (AL, AK, AR, CO, GA, MA, MN, OK, TN, TX, VT, VA)
2: US ADP Employment Change
3: US ISM Non-manufacturing PMI; US Factory Orders; China Caixin Services PMI
4: US Payrolls & Unemployment; US Trade Balance
Saturday, January 2, 2016
Barrons Saturday summary
Barrons Saturday summary: Positive on MAT, VALE, cruise stocks, and defensive energy names; Cautious on P and 3D printing
Cover story: Barrons looks at some of the best sector picks for 2016, noting that there are still plenty of places to find decent income in stock and bond markets, even with many key interest rates at or near historically low levels. Investors can get yields of 4% to 9% on a range of investments, including junk bonds, utility stocks, telecom shares, and real estate investment trusts.
Tech Trader: Companies such as AMZN, MSFT, and CRM revealed more about their cloud-based operations in 2015, but a number of questions remain, and as details emerge old-guard tech stocks such as ORCL, HPE, and CSCO could get a boost.
Trader: In 2015, moves among major global indexes and asset classes show U.S.-based investors who shorted oil and energy stocks or bought the dollar did well; Many prognosticators see a 10% rise in the market in 2016, though Barrons says its more likely to be flat to 5%; Positive on VALE: Company has taken a hit because of the plunge in iron-ore prices, but the stock could discount most of the headwinds, so that even small improvements could boost the shares.
Interview: Chris Hyzy, chief investment officer at Bank of America Global Wealth and Investment Management, says stocks could see a 7-8% return in 2016, and doesnt think a recession is imminent.
Profile: Brian McMahon and Vincent Walden, portfolio managers, Thornburg Global Opportunities fund, embrace an approach to investing that is both extremely flexible and extremely focused (top 10 holdings: LVLT, GOOGL, VER, MDLZ, TMUS, HP, C, ESRX, AAL, COF).
Features:
1) Positive on CCL, NCLH, RCL: Demand in the cruise industry is growing, especially from the fast-growing Chinese market, which coupled with low fuel prices and new ways to boost profitability bode well for shares in 2016;
2) Cautious on P: Internet radio company continues to feel pressure from companies such as Spotify, AAPL, MSFT, and GOOGL that offer streaming services; shares remain pricey even after a recent drop, and could fall by another 20%;
3) Cautious on ACAS, TICC, FSC: Business-development companies face pressure from activist investors to boost returns; American Capital, primarily owned by institutional investors, agreed to a potential breakup at the request of Elliott Management, which if successful could spur other firms to follow suit.
Follow-Up: Positive on MAT: Investors should keep their shares, because core brands are doing well, the dividend is strong, a new toy lineup should boost sales, and shares remain reasonably priced relative to potential earnings; Cautious on DDD, SSYS: Shares of 3-D printing companies could fall further amid growing competition and questions about the market potential in this sector.
European Trader: Positive on Akzo Nobel: Shares of paint and coatings maker could climb by as much as 20% during the next 12 months following a restructuring and cost-cutting.
Asian Trader: Asian equity strategists think Indonesia will have a good year, though improvement may not be evident until the second half (positive on Pembangunan Perumahan, Jasa Marga Persero, Bank Mandiri).
Emerging Markets: Africas two biggest economies, South Africa and Nigeria, face different challenges in 2016, but both need to reform financial policies.
Commodities: Gold shares are down, creating a potential draw for investors, but the precious metal could continue to be a losing bet in 2016 amid an ongoing downturn in raw-materials prices.
Streetwise: Positive on CVX, OXY, DVN, NBL, NBR, PTEN: Companies are among those in JPMs Defensive Energy Basket, which focuses on firms that have stronger balance sheets, better asset quality, and lower costs
Cover story: Barrons looks at some of the best sector picks for 2016, noting that there are still plenty of places to find decent income in stock and bond markets, even with many key interest rates at or near historically low levels. Investors can get yields of 4% to 9% on a range of investments, including junk bonds, utility stocks, telecom shares, and real estate investment trusts.
Tech Trader: Companies such as AMZN, MSFT, and CRM revealed more about their cloud-based operations in 2015, but a number of questions remain, and as details emerge old-guard tech stocks such as ORCL, HPE, and CSCO could get a boost.
Trader: In 2015, moves among major global indexes and asset classes show U.S.-based investors who shorted oil and energy stocks or bought the dollar did well; Many prognosticators see a 10% rise in the market in 2016, though Barrons says its more likely to be flat to 5%; Positive on VALE: Company has taken a hit because of the plunge in iron-ore prices, but the stock could discount most of the headwinds, so that even small improvements could boost the shares.
Interview: Chris Hyzy, chief investment officer at Bank of America Global Wealth and Investment Management, says stocks could see a 7-8% return in 2016, and doesnt think a recession is imminent.
Profile: Brian McMahon and Vincent Walden, portfolio managers, Thornburg Global Opportunities fund, embrace an approach to investing that is both extremely flexible and extremely focused (top 10 holdings: LVLT, GOOGL, VER, MDLZ, TMUS, HP, C, ESRX, AAL, COF).
Features:
1) Positive on CCL, NCLH, RCL: Demand in the cruise industry is growing, especially from the fast-growing Chinese market, which coupled with low fuel prices and new ways to boost profitability bode well for shares in 2016;
2) Cautious on P: Internet radio company continues to feel pressure from companies such as Spotify, AAPL, MSFT, and GOOGL that offer streaming services; shares remain pricey even after a recent drop, and could fall by another 20%;
3) Cautious on ACAS, TICC, FSC: Business-development companies face pressure from activist investors to boost returns; American Capital, primarily owned by institutional investors, agreed to a potential breakup at the request of Elliott Management, which if successful could spur other firms to follow suit.
Follow-Up: Positive on MAT: Investors should keep their shares, because core brands are doing well, the dividend is strong, a new toy lineup should boost sales, and shares remain reasonably priced relative to potential earnings; Cautious on DDD, SSYS: Shares of 3-D printing companies could fall further amid growing competition and questions about the market potential in this sector.
European Trader: Positive on Akzo Nobel: Shares of paint and coatings maker could climb by as much as 20% during the next 12 months following a restructuring and cost-cutting.
Asian Trader: Asian equity strategists think Indonesia will have a good year, though improvement may not be evident until the second half (positive on Pembangunan Perumahan, Jasa Marga Persero, Bank Mandiri).
Emerging Markets: Africas two biggest economies, South Africa and Nigeria, face different challenges in 2016, but both need to reform financial policies.
Commodities: Gold shares are down, creating a potential draw for investors, but the precious metal could continue to be a losing bet in 2016 amid an ongoing downturn in raw-materials prices.
Streetwise: Positive on CVX, OXY, DVN, NBL, NBR, PTEN: Companies are among those in JPMs Defensive Energy Basket, which focuses on firms that have stronger balance sheets, better asset quality, and lower costs
Thursday, December 31, 2015
Tough Year for Investors Goes Out on a Cheerless Note
TradeTheNews.com Weekly
Market Update: Tough Year for Investors Goes Out on a Cheerless Note
Thu, 31 Dec 2015 16:15 PM EST
The week started off on a sour note as Chinese stocks tumbled on Monday after the latest industrial profits data declined for the sixth straight month. US data was mostly disappointing as well, with key regional readings in Chicago and Dallas dropping sharply. The 2-, 5-, and 7-year treasury auctions all showed poor results and dragged yields higher for the week. Crude oil prices dripped lower again and continued to exert influence on broader markets. US stocks alternated red and green in the post-holiday week as the S&P flipped back and forth from positive to negative on the year. For the week, the DJIA was down 0.7%, and the Nasdaq and S&P500 each lost 0.8%. For the year, the DJIA fell 2.2%, the Nasdaq gained 5.7%, and the S&P500 slipped 0.7%, its first losing year since 2011.
Early in the week, China reported November Industrial Profits at -1.4% y/y, its sixth straight decline. At the same time Japan announced its first decline in m/m retail sales in four months and first m/m drop in industrial production in three months. The poor economic data continued in the US as the Dallas Fed Manufacturing reading hit its lowest mark in seven months and the Chicago Purchasing Managers Index tumbled to its lowest in over five years. The Chicago PMI number was particularly disappointing because it showed big declines new orders, order backlogs and the employment index. The 42.9 reading for December was the seventh reading of the Chicago PMI this year that was below 50, indicating contraction. Weekly initial jobless claims were also disappointing, registering the highest number since July, though this may be attributable to holiday week volatility. On a brighter note, the December US Consumer Confidence reading beat expectations and showed a rise in the perception that job opportunities are "plentiful."
Interest rate futures fell hard on Tuesday following a very disappointing 5-year treasury auction. The 2-year yield reached its highest level since early 2010 to above 1.10%, the 5-year yield hit its high of the year above 1.79%, and the 30-year fell 2 points, putting the yield above 3.04%. The 2- and 7-year auctions that bookended the 5-year sale were also weak, perhaps attributable to the slow holiday week. Treasuries pared losses on Thursday after the higher than expected jobless claims. For the year, the 2/10-year yield spread narrowed to its smallest since 2008 as the treasury curve flattened: the 2-year yield jumped 38 basis points, while the 10-year yield was up only 8 basis points during 2015.
With relatively few corporate or macro developments during the week, broader markets were pushed around again by activity in the energy market. Saudi Arabia's 2016 budget plan showed that weak oil prices are hurting its fiscal situation, but despite that the energy ministry affirmed it would hold steady on its production policy. WTI and Brent crude are now trading in lockstep and each lost nearly 3% during the week, ending 2015 down by over 30% on top of last year's steep losses. That kept downward pressure on energy equities despite some bargain hunters picking through the wreckage. Cold weather finally swept across most of the US, helping natural gas achieve a sharp rebound this week, gaining more than 12%.
In the FX market, the dollar strengthened against the euro, emblematic of the year's move. For the week, EUR/USD peaked at just under 1.10 and ended around 1.086. For 2015, the euro fell 10.3% against the dollar, while the greenback gained a more modest 0.5% against the yen, though that was the fourth straight year the USD/JPY has risen.
On the M&A front, Carl Icahn won the bidding war for Pep Boys, cinching a deal at $18.50/share, valuing the auto service company at about $1 billion. Bridgestone said it would not go around again with another counteroffer. Media General shares lifted on Thursday on a report that Nexstar had raised the funds it needs to pursue a planned takeover offer. Another report said that Liberty Global and Vodafone may soon resume merger discussions, which could ultimately lead to a £140 billion deal.
Thu, 31 Dec 2015 16:15 PM EST
The week started off on a sour note as Chinese stocks tumbled on Monday after the latest industrial profits data declined for the sixth straight month. US data was mostly disappointing as well, with key regional readings in Chicago and Dallas dropping sharply. The 2-, 5-, and 7-year treasury auctions all showed poor results and dragged yields higher for the week. Crude oil prices dripped lower again and continued to exert influence on broader markets. US stocks alternated red and green in the post-holiday week as the S&P flipped back and forth from positive to negative on the year. For the week, the DJIA was down 0.7%, and the Nasdaq and S&P500 each lost 0.8%. For the year, the DJIA fell 2.2%, the Nasdaq gained 5.7%, and the S&P500 slipped 0.7%, its first losing year since 2011.
Early in the week, China reported November Industrial Profits at -1.4% y/y, its sixth straight decline. At the same time Japan announced its first decline in m/m retail sales in four months and first m/m drop in industrial production in three months. The poor economic data continued in the US as the Dallas Fed Manufacturing reading hit its lowest mark in seven months and the Chicago Purchasing Managers Index tumbled to its lowest in over five years. The Chicago PMI number was particularly disappointing because it showed big declines new orders, order backlogs and the employment index. The 42.9 reading for December was the seventh reading of the Chicago PMI this year that was below 50, indicating contraction. Weekly initial jobless claims were also disappointing, registering the highest number since July, though this may be attributable to holiday week volatility. On a brighter note, the December US Consumer Confidence reading beat expectations and showed a rise in the perception that job opportunities are "plentiful."
Interest rate futures fell hard on Tuesday following a very disappointing 5-year treasury auction. The 2-year yield reached its highest level since early 2010 to above 1.10%, the 5-year yield hit its high of the year above 1.79%, and the 30-year fell 2 points, putting the yield above 3.04%. The 2- and 7-year auctions that bookended the 5-year sale were also weak, perhaps attributable to the slow holiday week. Treasuries pared losses on Thursday after the higher than expected jobless claims. For the year, the 2/10-year yield spread narrowed to its smallest since 2008 as the treasury curve flattened: the 2-year yield jumped 38 basis points, while the 10-year yield was up only 8 basis points during 2015.
With relatively few corporate or macro developments during the week, broader markets were pushed around again by activity in the energy market. Saudi Arabia's 2016 budget plan showed that weak oil prices are hurting its fiscal situation, but despite that the energy ministry affirmed it would hold steady on its production policy. WTI and Brent crude are now trading in lockstep and each lost nearly 3% during the week, ending 2015 down by over 30% on top of last year's steep losses. That kept downward pressure on energy equities despite some bargain hunters picking through the wreckage. Cold weather finally swept across most of the US, helping natural gas achieve a sharp rebound this week, gaining more than 12%.
In the FX market, the dollar strengthened against the euro, emblematic of the year's move. For the week, EUR/USD peaked at just under 1.10 and ended around 1.086. For 2015, the euro fell 10.3% against the dollar, while the greenback gained a more modest 0.5% against the yen, though that was the fourth straight year the USD/JPY has risen.
On the M&A front, Carl Icahn won the bidding war for Pep Boys, cinching a deal at $18.50/share, valuing the auto service company at about $1 billion. Bridgestone said it would not go around again with another counteroffer. Media General shares lifted on Thursday on a report that Nexstar had raised the funds it needs to pursue a planned takeover offer. Another report said that Liberty Global and Vodafone may soon resume merger discussions, which could ultimately lead to a £140 billion deal.
Sunday, December 27, 2015
Barrons Saturday summary
Barrons Saturday summary: Positive on GOOGL, FB, AMZN, NFLX, SIG, BLX, SALE, and some energy names; Cautious on POST, EEM, FNMA, FMCC
Cover story: GOOGL's YouTube may be more valuable than NFLX; Investors should look at it for three reasons:
1) YouTube is growing at an astonishing pace, with viewing time up 60% and mobile viewing doubling year over year, posing a major threat to traditional TV;
2) It has 15 times as many viewers at Netflix, and money is following them; revenue per average viewer could double in five years;
3) Alphabet is returning cash to stockholders and buying back shares.
Tech Trader: Positive on FB, AMZN, NFLX, GOOGL: So-called FANG companies will likely continue to prosper in 2016 as they generate better-than-average growth and prove they are in for the long haul; the companies will benefit from a winding-down of private-market investment in private companies with huge valuations, such as Uber.
Trader: Market breadth improved as investors went for oversold stocks, a positive sign since equity gains have been concentrated this year in a handful of mostly tech stocks that have risen by double and triple digits; A look ahead at 2016, which should see some small growth for S&P 500 companies, though revenue growth may be hard to find, while the biggest risk to stocks may be geopolitical; When choosing sectors for the new year, says Sam Stovall of S&P Capital IQ, "history shows you are better off owning the three best sectors of the previous year."
Interview: Harvard history professor Niall Ferguson sees more trouble ahead for Europe, China-whose attempt to move to a true market economy will probably fail-and Saudi Arabia, which could see the kind of destabilization Iran did in the 70s; however, countries with cheap stocks and political stability could beckon investors.
Features:
1) Positive on SIG: Mainstream jeweler, parent of brands including Jared, Kay Jewelers, and Zale Corp., is increasing market share with aggressive ad campaigns, and it hasn't been hit by the strong dollar the way upscale firms such as TIF have;
2) Positive on VLO, TSO, SCTY, FSLR, OXY, EOG, VNQ; Cautious on FNMA, FMCC: Energy companies will benefit from the new government budget deal and could see shares climb through 2018, while the mortgage giants will see no relief;
3) Positive on BLX: Firm's Scientific Active Equity group's ability to collect and analyze data has given rise to new a kind of fundamental investing based detailed analysis of big data.
Small Caps: Cautious on POST: Cereal giant has been acquiring packaged-food companies and has largely avoided the downward trend in small-cap stocks, but its rich valuation and challenging environment mean investors should consider taking profits now.
European Trader: "Hopes are high for European equities in 2016, as favorable conditions point toward outperformance. But picking the right stocks will be more important than ever" (Positive on LYG, ING, Commerzbank, Societe Generale, RDSB, Repsol).
Asian Trader: "Asia looks at least as tough next year as in 2015, with little growth and a smoggy outlook. But currency investors can get double-digit returns by buying yen and selling yuan" (Positive on Mitsubishi Estate, Mitsui Fudosan; Cautious on Nikon, SoftBank).
Emerging Markets: Emerging markets should see a slow and tortuous recovery next year, with companies that undergo structural reform likely to have winning stock markets.
Commodities: Precious and industrial metals should keep falling in 2016 because of rising global supply, weaker demand in China, and a stronger dollar, and the overall commodity sector will remain troubled.
Streetwise: Positive on SALE: Shares of online coupon marketplace-which hasn't met investors expectations-are cheap, and investors will benefit even if the company moves "from bad to average."
Cover story: GOOGL's YouTube may be more valuable than NFLX; Investors should look at it for three reasons:
1) YouTube is growing at an astonishing pace, with viewing time up 60% and mobile viewing doubling year over year, posing a major threat to traditional TV;
2) It has 15 times as many viewers at Netflix, and money is following them; revenue per average viewer could double in five years;
3) Alphabet is returning cash to stockholders and buying back shares.
Tech Trader: Positive on FB, AMZN, NFLX, GOOGL: So-called FANG companies will likely continue to prosper in 2016 as they generate better-than-average growth and prove they are in for the long haul; the companies will benefit from a winding-down of private-market investment in private companies with huge valuations, such as Uber.
Trader: Market breadth improved as investors went for oversold stocks, a positive sign since equity gains have been concentrated this year in a handful of mostly tech stocks that have risen by double and triple digits; A look ahead at 2016, which should see some small growth for S&P 500 companies, though revenue growth may be hard to find, while the biggest risk to stocks may be geopolitical; When choosing sectors for the new year, says Sam Stovall of S&P Capital IQ, "history shows you are better off owning the three best sectors of the previous year."
Interview: Harvard history professor Niall Ferguson sees more trouble ahead for Europe, China-whose attempt to move to a true market economy will probably fail-and Saudi Arabia, which could see the kind of destabilization Iran did in the 70s; however, countries with cheap stocks and political stability could beckon investors.
Features:
1) Positive on SIG: Mainstream jeweler, parent of brands including Jared, Kay Jewelers, and Zale Corp., is increasing market share with aggressive ad campaigns, and it hasn't been hit by the strong dollar the way upscale firms such as TIF have;
2) Positive on VLO, TSO, SCTY, FSLR, OXY, EOG, VNQ; Cautious on FNMA, FMCC: Energy companies will benefit from the new government budget deal and could see shares climb through 2018, while the mortgage giants will see no relief;
3) Positive on BLX: Firm's Scientific Active Equity group's ability to collect and analyze data has given rise to new a kind of fundamental investing based detailed analysis of big data.
Small Caps: Cautious on POST: Cereal giant has been acquiring packaged-food companies and has largely avoided the downward trend in small-cap stocks, but its rich valuation and challenging environment mean investors should consider taking profits now.
European Trader: "Hopes are high for European equities in 2016, as favorable conditions point toward outperformance. But picking the right stocks will be more important than ever" (Positive on LYG, ING, Commerzbank, Societe Generale, RDSB, Repsol).
Asian Trader: "Asia looks at least as tough next year as in 2015, with little growth and a smoggy outlook. But currency investors can get double-digit returns by buying yen and selling yuan" (Positive on Mitsubishi Estate, Mitsui Fudosan; Cautious on Nikon, SoftBank).
Emerging Markets: Emerging markets should see a slow and tortuous recovery next year, with companies that undergo structural reform likely to have winning stock markets.
Commodities: Precious and industrial metals should keep falling in 2016 because of rising global supply, weaker demand in China, and a stronger dollar, and the overall commodity sector will remain troubled.
Streetwise: Positive on SALE: Shares of online coupon marketplace-which hasn't met investors expectations-are cheap, and investors will benefit even if the company moves "from bad to average."
Thursday, December 24, 2015
Chipotle Suffers, Crude Awakening
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Weekly Market Update: Chipotle Suffers, Crude Awakening
Thu, 24 Dec 2015 13:17 PM EST
**Economic data:
- (FR) France Nov Net Change Jobseekers: -15.0K v -10.0Ke; Total Jobseekers: 3.575M v 3.590Me
- (IL) Israel Nov Unemployment Rate: 5.4% v 5.3% prior
- (RU) Russia Gold and Forex Reserve w/e Dec 18th: $368.9B v $371.2B prior
- (US) Initial Jobless Claims: 267K v 270Ke; Continuing Claims: 1.195M v 2.20Me
- (MX) Mexico Nov Trade Balance: -$1.6B v -$2.2Be
- (MX) Mexico Nov Unemployment Rate: 4.0% v 4.3%e; Unemployment Rate (Seasonally Adj): 4.1% v 4.3%e
- (US) Weekly EIA Natural Gas Inventories: -32 bcf vs. -28 to -24 bcf expected range
Markets lulled into holiday mode on a shortened Christmas Eve trading day and ended flat, with no discernible sign of a Santa Claus rally. Jobless claims came in largely in line with estimates Thursday morning, and the dollar weakened against most major pairs. EIA natural gas inventories fell more than expected, sending prices higher briefly, but couldn't catch the same momentum as crude prices, which gained for the third straight day. In equity news, Omega's Leon Cooperman disclosed an increased stake in REXI, sending its shares up +28%, and Fiat Chrysler announced a recall of 350K SUVs in the US due to a vanity mirror wiring issue.
For the week, the markets shook off anxieties about rising Fed rates and problems developing in the high yield market, as well as concerns about the inconclusive Spanish election on Sunday, and equity markets lifted on light volume. For the week, the DJIA gained 2.5%, the S&P500 rose 2.8%, and the Nasdaq added 2.5%.
The third and final reading of third-quarter GDP showed the US economy grew at a 2% pace in the quarter. Expectations were for the reading to show the economy growing at a 1.9% pace in the third quarter, down slightly from the preliminary reading of 2.1% reported last month. The slight downgrade was triggered by a larger trade deficit and a smaller buildup in inventories. The November existing home sales report was somewhat concerning, as the annualized sales rate plunged more than 10% from October levels and undershot expectations by approximately the same percentage. The NAR cited a range of possible reasons for the surprisingly weak report, including new regulations that came on line last month, the lead-up to Fed rate hikes and a big rise in median home prices on a y/y basis.
Spain's general elections offered a consolation prize to the anti-austerity camp, but hardly delivered the upset some were predicting. The conservative, ruling Popular Party (PP) won the most seats, but lost its majority as two upstart parties divided the vote. PP ceded a number of seats to leftist, populist Podemos and centrist Ciudadanos, and will either have to look for a partner or attempt to form a minority government, increasing the chances of political turmoil. Spains IBEX index fell more than 3% on the inconclusive election result, while the bond market reaction was more muted: Spanish 10-year treasuries were up a maximum of 20 bps at their weakest on Monday, but had regained nearly half that amount by Tuesday. EUR/USD shrugged off the election almost completely.
In the first half of the week crude futures continued to slide, but with a new wrinkle. Within days of the US Congress lifting a 40 year old ban on oil exports, WTI and Brent prices converged, and by Tuesday Brent has lost its entire premium over WTI. After hitting fresh multi-year lows, crude rebounded sharply on Wednesday and Thursday, helped by an OPEC report forecasting higher oil prices over the long term and by a big draw in weekly DOE crude inventory data.
Nike reported another solid quarter with strong futures orders, but profit taking emerged after shares hit a new all-time high. In the tech sector, Micron mostly met expectations for its first quarter, but gave terrible guidance for Q2, pushing its growth story to the second half of the fiscal year. Home goods retailer Bed Bath & Beyond plumbed a new 52-week low after cutting Q3 guidance, indicating disappointing holiday shopping results. Shares of Chipotle puked again after the CDC announced a second strain of E.coli had sickened restaurant patrons in three new states.
On the M&A front, Pep Boys shares saw more gains as billionaire Carl Icahn is now in an all-out bidding war with Bridgestone. In raising his offer this week, Icahn said he would be willing to outbid Bridgestone by $0.10 a share on any bona fide offer from Bridgestone, up to $18.10/share. Carl Icahn's bid received FTC early termination approval, and now PBY awaits a counteroffer from Bridgestone expected later Thursday afternoon. The FTC rejected Staples' offer to revise its $6.3 billion acquisition of rival Office Depot, casting more doubt on the completion of a merger of the two largest office supply chains. Staples disclosed the FTC had rejected its offer to sell $1.25 billion of contracts in what it described as "an effort to create an acceptable remedy" to concerns that the combined company would have too much control of the commercial market for office supplies.
**Looking Ahead***
All times listed for economic events are denominated in Eastern Standard Time (Add 5 hours for GMT equivalent)
- 18:30 (JP) Japan Nov Jobless Rate: 3.2%e v 3.1% prior; Job-To-Applicant Ratio: 1.24e v 1.24 prior
- 18:30 (JP) Japan Nov Overall Household Spending Y/Y: -2.2%e v -2.4% prior
- 18:30 (JP) Japan Nov National CPI Y/Y: 0.3%e v 0.3% prior; CPI Ex-Fresh Food (Core) Y/Y: 0.0%e v -0.1% prior; CPI Ex Food/Energy (Core/Core) Y/Y: 0.8%e v 0.7% prior
- 18:30 (JP) Japan Dec Tokyo CPI Y/Y: 0.1%e v 0.2% prior; CPI Ex-Fresh Food Y/Y: 0.1%e v 0.0% prior; CPI Ex Food/Energy Y/Y: 0.6%e v 0.6% prior
- 18:50 (JP) Japan Nov PPI Services Y/Y: 0.4%e v 0.5% prior
- 23:00 (JP) BOJ Gov Kuroda speech
Friday events
- 00:00 (JP) Japan Oct Final Leading Index CI: No est v 102.9 prelim; Coincident Index: No est v 114.3 prelim
- 00:00 (JP) Japan Nov Annualized Housing Starts: 890Ke v 862K prior; Housing Starts Y/Y: +0.6%e v -2.5% prior; Construction Orders Y/Y: No est v -25.2% prior
- 03:00 (CN) Shanghai Futures Exchange (SHFE) Weekly Copper Stockpiles: No est v 179.6K prior
- 03:00 (RU) Russia Narrow Money Supply w/e Dec 18th (RUB): No est v 8.20T prior
- 20:30 (VN) Vietnam Q4 YTD GDP Y/Y: 6.6%e v 6.5% prior
- 20:30 (VN) Vietnam Dec Trade Balance: No est v -$200M prior; Exports YTD Y/Y: No est v 8.3% prior; Imports YTD Y/Y: No est v 13.7% prior
- 20:30 (VN) Vietnam Dec Industrial Production Y/Y: No est v 8.9% prior
- 20:30 (VN) Vietnam Dec YTD Retail Sales Y/Y: No est v 9.4% prior
Weekend data
- Sat: 20:30 (CN) China Nov Industrial Profits Y/Y: No est v -4.6% prior
Thu, 24 Dec 2015 13:17 PM EST
**Economic data:
- (FR) France Nov Net Change Jobseekers: -15.0K v -10.0Ke; Total Jobseekers: 3.575M v 3.590Me
- (IL) Israel Nov Unemployment Rate: 5.4% v 5.3% prior
- (RU) Russia Gold and Forex Reserve w/e Dec 18th: $368.9B v $371.2B prior
- (US) Initial Jobless Claims: 267K v 270Ke; Continuing Claims: 1.195M v 2.20Me
- (MX) Mexico Nov Trade Balance: -$1.6B v -$2.2Be
- (MX) Mexico Nov Unemployment Rate: 4.0% v 4.3%e; Unemployment Rate (Seasonally Adj): 4.1% v 4.3%e
- (US) Weekly EIA Natural Gas Inventories: -32 bcf vs. -28 to -24 bcf expected range
Markets lulled into holiday mode on a shortened Christmas Eve trading day and ended flat, with no discernible sign of a Santa Claus rally. Jobless claims came in largely in line with estimates Thursday morning, and the dollar weakened against most major pairs. EIA natural gas inventories fell more than expected, sending prices higher briefly, but couldn't catch the same momentum as crude prices, which gained for the third straight day. In equity news, Omega's Leon Cooperman disclosed an increased stake in REXI, sending its shares up +28%, and Fiat Chrysler announced a recall of 350K SUVs in the US due to a vanity mirror wiring issue.
For the week, the markets shook off anxieties about rising Fed rates and problems developing in the high yield market, as well as concerns about the inconclusive Spanish election on Sunday, and equity markets lifted on light volume. For the week, the DJIA gained 2.5%, the S&P500 rose 2.8%, and the Nasdaq added 2.5%.
The third and final reading of third-quarter GDP showed the US economy grew at a 2% pace in the quarter. Expectations were for the reading to show the economy growing at a 1.9% pace in the third quarter, down slightly from the preliminary reading of 2.1% reported last month. The slight downgrade was triggered by a larger trade deficit and a smaller buildup in inventories. The November existing home sales report was somewhat concerning, as the annualized sales rate plunged more than 10% from October levels and undershot expectations by approximately the same percentage. The NAR cited a range of possible reasons for the surprisingly weak report, including new regulations that came on line last month, the lead-up to Fed rate hikes and a big rise in median home prices on a y/y basis.
Spain's general elections offered a consolation prize to the anti-austerity camp, but hardly delivered the upset some were predicting. The conservative, ruling Popular Party (PP) won the most seats, but lost its majority as two upstart parties divided the vote. PP ceded a number of seats to leftist, populist Podemos and centrist Ciudadanos, and will either have to look for a partner or attempt to form a minority government, increasing the chances of political turmoil. Spains IBEX index fell more than 3% on the inconclusive election result, while the bond market reaction was more muted: Spanish 10-year treasuries were up a maximum of 20 bps at their weakest on Monday, but had regained nearly half that amount by Tuesday. EUR/USD shrugged off the election almost completely.
In the first half of the week crude futures continued to slide, but with a new wrinkle. Within days of the US Congress lifting a 40 year old ban on oil exports, WTI and Brent prices converged, and by Tuesday Brent has lost its entire premium over WTI. After hitting fresh multi-year lows, crude rebounded sharply on Wednesday and Thursday, helped by an OPEC report forecasting higher oil prices over the long term and by a big draw in weekly DOE crude inventory data.
Nike reported another solid quarter with strong futures orders, but profit taking emerged after shares hit a new all-time high. In the tech sector, Micron mostly met expectations for its first quarter, but gave terrible guidance for Q2, pushing its growth story to the second half of the fiscal year. Home goods retailer Bed Bath & Beyond plumbed a new 52-week low after cutting Q3 guidance, indicating disappointing holiday shopping results. Shares of Chipotle puked again after the CDC announced a second strain of E.coli had sickened restaurant patrons in three new states.
On the M&A front, Pep Boys shares saw more gains as billionaire Carl Icahn is now in an all-out bidding war with Bridgestone. In raising his offer this week, Icahn said he would be willing to outbid Bridgestone by $0.10 a share on any bona fide offer from Bridgestone, up to $18.10/share. Carl Icahn's bid received FTC early termination approval, and now PBY awaits a counteroffer from Bridgestone expected later Thursday afternoon. The FTC rejected Staples' offer to revise its $6.3 billion acquisition of rival Office Depot, casting more doubt on the completion of a merger of the two largest office supply chains. Staples disclosed the FTC had rejected its offer to sell $1.25 billion of contracts in what it described as "an effort to create an acceptable remedy" to concerns that the combined company would have too much control of the commercial market for office supplies.
**Looking Ahead***
All times listed for economic events are denominated in Eastern Standard Time (Add 5 hours for GMT equivalent)
- 18:30 (JP) Japan Nov Jobless Rate: 3.2%e v 3.1% prior; Job-To-Applicant Ratio: 1.24e v 1.24 prior
- 18:30 (JP) Japan Nov Overall Household Spending Y/Y: -2.2%e v -2.4% prior
- 18:30 (JP) Japan Nov National CPI Y/Y: 0.3%e v 0.3% prior; CPI Ex-Fresh Food (Core) Y/Y: 0.0%e v -0.1% prior; CPI Ex Food/Energy (Core/Core) Y/Y: 0.8%e v 0.7% prior
- 18:30 (JP) Japan Dec Tokyo CPI Y/Y: 0.1%e v 0.2% prior; CPI Ex-Fresh Food Y/Y: 0.1%e v 0.0% prior; CPI Ex Food/Energy Y/Y: 0.6%e v 0.6% prior
- 18:50 (JP) Japan Nov PPI Services Y/Y: 0.4%e v 0.5% prior
- 23:00 (JP) BOJ Gov Kuroda speech
Friday events
- 00:00 (JP) Japan Oct Final Leading Index CI: No est v 102.9 prelim; Coincident Index: No est v 114.3 prelim
- 00:00 (JP) Japan Nov Annualized Housing Starts: 890Ke v 862K prior; Housing Starts Y/Y: +0.6%e v -2.5% prior; Construction Orders Y/Y: No est v -25.2% prior
- 03:00 (CN) Shanghai Futures Exchange (SHFE) Weekly Copper Stockpiles: No est v 179.6K prior
- 03:00 (RU) Russia Narrow Money Supply w/e Dec 18th (RUB): No est v 8.20T prior
- 20:30 (VN) Vietnam Q4 YTD GDP Y/Y: 6.6%e v 6.5% prior
- 20:30 (VN) Vietnam Dec Trade Balance: No est v -$200M prior; Exports YTD Y/Y: No est v 8.3% prior; Imports YTD Y/Y: No est v 13.7% prior
- 20:30 (VN) Vietnam Dec Industrial Production Y/Y: No est v 8.9% prior
- 20:30 (VN) Vietnam Dec YTD Retail Sales Y/Y: No est v 9.4% prior
Weekend data
- Sat: 20:30 (CN) China Nov Industrial Profits Y/Y: No est v -4.6% prior
Saturday, December 19, 2015
Barrons Saturday summary
Barrons Saturday summary: Positive cover story on MSFT; positive on SNA, MON, and asset management stocks
Cover story: Positive on MSFT: Under chief executive Satya Nadella, Microsoft's vast scale has become an asset rather than a liability, and the company is competing strongly with AMZN in the cloud and building new hardware that rivals AAPL's; Nadella "has captured Bill Gates' innovative style and the growth that often eluded Steve Ballmer," a formula that promises more upside.
Features:
1) Positive on BLK, IVZ, BEN, TROW: Asset managers' shares are down, but investors "are overlooking the industry's favorable characteristics, including modest capital requirements, high profit margins, and strong cash returns to shareholders";
2) Positive on SNA: Shares are up 25% this year, and "strong revenue growth, margin gains, and double-digit earnings increases will provide further fuel for the stock";
3) Positive on MON: Company's dwindling premium presents a good opportunity for investors, and fast growth in new areas could double earnings within three years.
Tech Trader: Though Barron's correctly predicted that investors would reap gains from so-called FANG (FB, AMZN, NFLX, GOOGL) companies in 2015, older tech players such as WDC, STX, EMC, and NTAP didn't fare as well, partly because of fallout in the PC market.
Trader: Weak oil prices and slowing global growth remain major concerns for investors, says Cameron Hinds of Wells Fargo Private Bank, and volatility might increase over the near term for other technical reasons; Four factors dogged stocks this year: lower commodity prices, a strong dollar, soft economic growth and currency devaluation in China; and the Fed's interest-rate hike; Unlike in 2014, the Trader's picks underperformed the market in 2015.
Interview: David Levy, chairman of the Jerome Levy Forecasting Center, says that although the U.S. economy is in good shape, it's not strong enough to fend off weakening fundamentals elsewhere, especially emerging markets.
Profile: Sonu Kaira, portfolio manager, Fidelity Blue Chip Growth fund, keeps 20% of his holdings in small and midsize companies that could see double-digit earnings growth (top 10 holdings: AAPL, GOOGL, AMZN, FB, GOOG, GILD, CRM, HD, V, AGN).
Small Caps: Positive on PTEN: Driller is a standout in the troubled oil sector because of its defensive qualities, including financial strength and a fleet of modern, top-notch equipment that limit potential downside.
European Trader: European stocks are finishing the year with solid gains, and the region is on firmer footing than it was 12 months ago.
Asian Trader: Asia's weak performance in 2015 stems from a retreat by global investors "who couldn't envision strong corporate returns in most of the region and worried that emerging market countries with dollar-decimated debt would be hurt."
Emerging Markets: Emerging markets took a hit this year from the decline in oil and commodities prices and weakening Chinese demand, and countries' domestic policy often did more damage than worry about the Fed.
Commodities Corner: "The strength of the dollar will give no reprieve next year to already pummeled commodities markets."
Streetwise: VRX was the ultimate "myth-versus-market" company in 2015, and disproved hedge-fund manager Bill Ackman's claim that it would be the next Berkshire Hathaway.
Cover story: Positive on MSFT: Under chief executive Satya Nadella, Microsoft's vast scale has become an asset rather than a liability, and the company is competing strongly with AMZN in the cloud and building new hardware that rivals AAPL's; Nadella "has captured Bill Gates' innovative style and the growth that often eluded Steve Ballmer," a formula that promises more upside.
Features:
1) Positive on BLK, IVZ, BEN, TROW: Asset managers' shares are down, but investors "are overlooking the industry's favorable characteristics, including modest capital requirements, high profit margins, and strong cash returns to shareholders";
2) Positive on SNA: Shares are up 25% this year, and "strong revenue growth, margin gains, and double-digit earnings increases will provide further fuel for the stock";
3) Positive on MON: Company's dwindling premium presents a good opportunity for investors, and fast growth in new areas could double earnings within three years.
Tech Trader: Though Barron's correctly predicted that investors would reap gains from so-called FANG (FB, AMZN, NFLX, GOOGL) companies in 2015, older tech players such as WDC, STX, EMC, and NTAP didn't fare as well, partly because of fallout in the PC market.
Trader: Weak oil prices and slowing global growth remain major concerns for investors, says Cameron Hinds of Wells Fargo Private Bank, and volatility might increase over the near term for other technical reasons; Four factors dogged stocks this year: lower commodity prices, a strong dollar, soft economic growth and currency devaluation in China; and the Fed's interest-rate hike; Unlike in 2014, the Trader's picks underperformed the market in 2015.
Interview: David Levy, chairman of the Jerome Levy Forecasting Center, says that although the U.S. economy is in good shape, it's not strong enough to fend off weakening fundamentals elsewhere, especially emerging markets.
Profile: Sonu Kaira, portfolio manager, Fidelity Blue Chip Growth fund, keeps 20% of his holdings in small and midsize companies that could see double-digit earnings growth (top 10 holdings: AAPL, GOOGL, AMZN, FB, GOOG, GILD, CRM, HD, V, AGN).
Small Caps: Positive on PTEN: Driller is a standout in the troubled oil sector because of its defensive qualities, including financial strength and a fleet of modern, top-notch equipment that limit potential downside.
European Trader: European stocks are finishing the year with solid gains, and the region is on firmer footing than it was 12 months ago.
Asian Trader: Asia's weak performance in 2015 stems from a retreat by global investors "who couldn't envision strong corporate returns in most of the region and worried that emerging market countries with dollar-decimated debt would be hurt."
Emerging Markets: Emerging markets took a hit this year from the decline in oil and commodities prices and weakening Chinese demand, and countries' domestic policy often did more damage than worry about the Fed.
Commodities Corner: "The strength of the dollar will give no reprieve next year to already pummeled commodities markets."
Streetwise: VRX was the ultimate "myth-versus-market" company in 2015, and disproved hedge-fund manager Bill Ackman's claim that it would be the next Berkshire Hathaway.
Friday, December 18, 2015
Liftoff At Last
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Weekly Market Update: Liftoff At Last
Fri, 18 Dec 2015 16:08 PM EST
The Fed raised rates for the first time in nearly a decade, fulfilling the forecast of a 2015 rate liftoff in the final policy meeting of the year. The well telegraphed move initially sent equities higher as market participants were relieved to finally get the first rate rise under their belt. The greenback strengthened on the rate move, keeping pressure on already weak energy prices. Other central banks reacted as countries closely aligned with the US economy raised rates in tandem while the Bank of Japan created more monetary policy divergence by adding more stimulus. As the Fed rate hike sank in, stocks sold off into the weekend and for the week the DJIA ended down 0.8%, the S&P fell 0.3%, and the Nasdaq lost 0.2%.
After the Fed spent the last year talking about rate liftoff, it finally happened on Wednesday. A 25 basis point hike took the key rate off of the zero bound where it has been sitting since December 2008. Chair Yellen said that a rate rise acknowledges that considerable progress has been made in the economic recovery. Yellen managed to keep the rate decision collegial, getting a unanimous vote in support of the hike, and supporting it with a mostly dovish statement. The Fed specified that the rate hike path will be "gradual," maintaining its median 'dot chart' forecast for about four more rate hikes in 2016.
US Treasury markets saw sellers emerge ahead of the FOMC announcement. On Tuesday the 2-year yield backed up to 1.00% for the first time since 2010 and the 10-year rate consolidated around 2.30%. By Friday though, a post-FOMC sell off in equities helped push yields lower and resulted in a flatter US curve. The benchmark 10-year finished the week some 12 basis points below pre FOMC levels.
Manufacturing continued to be a sore spot for the US economy. The December Philadelphia Fed Business Outlook fell to its lowest level in two years. The Markit Manufacturing PMI reading declined with its new orders component registers the weakest reading since 2009. November industrial production steepened its sequential slide and the October was revised lower. On a positive note, US housing starts in November rebounded from a seven-month low and permits surged to a five-month high. November marked the eighth straight month that starts remained above 1 million units, the longest stretch since 2007 and growth was seen in the single family segments.
Other central banks reacted to the historic Fed liftoff from the zero bound. The day after the Fed move, the Mexico central bank raised its rate by 25 basis points to 3.25%. The Banxico said the rate move was aimed at preventing further peso depreciation and that it would focus on relative monetary policy stance with the US. The Chile and Colombia central banks also raised rates by a quarter point each. Meanwhile, the Bank of Japan highlighted the ongoing theme of monetary policy divergence by unexpectedly announcing a ¥300B boost to its ETF purchase program on Friday.
Political turmoil in Brazil spilled into the financial markets when Fitch cut its sovereign rating to junk, matching a downgrade by S&P earlier this month. The announcement was wrapped around continued soft economic data and a growing political crisis in which President Rousseff faces impeachment and the finance minister is said to be on the way out. In neighboring Argentina, new President Macri lifted long standing currency controls, effectively resulting in a devaluation of the currency and sending it lower by ~28% against the US Dollar.
After announcing a tentative deal early in the week, the US Congress moved to pass a $1.1T omnibus spending bill on Friday. House Republican and Democrat leaders scraped together enough votes to pass the compromise bill and the Senate followed suit. One notable feature of the bill is the repeal of the ban on US crude oil exports, which was traded for authorizing a five year extension of solar tax credits. Solar energy stocks performed very well on this development, even as the broader energy sector showed weakness again as crude oil plumbed new lows.
Oil prices came into the week sitting near a 7-year low around $35/bbl and continued to drift lower with no relief. News that Congress lift the oil export ban imposed four decades ago was more than offset by a surprise build to US oil inventories. WTI finished the week below $35 and is closing in on the December 2008 low of $32.40. Brent is even closer to the previous low of $36.20 hit in late 2008. Natural gas fared no better, continuing to hit fresh 13-year lows below $2.00 as the week wore on and unseasonably warm weather continued in the eastern part of North American.
Cheap fuel costs have failed to spark the economy and the DJ Transportation Average has remained a bugaboo for many investors. Knight Transportation gapped lower after cutting its Q4 outlook, weighing on trucking and logistics competitors. On Friday, FedEx quickly gave back all of the gains it made on its Q2 earnings report earlier in the week. Shares of UPS and FDX came under substantial pressure follow a report that Amazon is in talks to lease 20 cargo jets from Boeing so that it can launch its own air-cargo service to handle more of its own shipments. By Friday, the DJ Transportation Average fell to a new 2015 low below 7400, further spooking some old-school Dow theorists.
Various US corporations offered up initial FY16 forecasts, and some were not very well received. MMM shares slid after cutting this year's forecast and guiding next year towards the low end of consensus expectations. Kennametal dropped aggressively after management guided FY16 earnings down as much as 60%. Oracle continued growth in the cloud market failed to impress investors who sold off shares following its Q2 earnings report.
On Tuesday, embattled drug-maker Valeant announced a deal to distribute some of its medicines at a discount through Walgreens pharmacies. The very next day Valeant reset investors' expectations by cutting its 2015 forecast and guiding FY16 earnings below expectations. Shares surged more than 15% as the company looked to put to bed weeks of controversy surrounding alleged questionable business practices.
Deal flow slowed this week but there were a few notable developments. Newell Rubbermaid agreed to buy Jarden for $60/share in a cash-and-stock deal valued around $15 billion. For each Jarden share, Newell will pay $21 in cash and 0.862 of a share in Newell. The companies pegged the deal's total value at $15.4 billion, when including the convertible debt on Jarden's balance sheet. Avon confirmed a long speculated tie up when private equity firm Cerberus agreed to acquire an 80% stake in Avon North America, separating it from its parent company. Cerberus also agreed to take a 16.6% stake in the parent company. As part of Avon's strategic restructuring management confirmed they were suspending the quarterly dividend. The regulatory reviews of the Baker Hughes Halliburton deal continued to push ahead slowly. Both European and US regulators extended their decision time frames into next year.
Fri, 18 Dec 2015 16:08 PM EST
The Fed raised rates for the first time in nearly a decade, fulfilling the forecast of a 2015 rate liftoff in the final policy meeting of the year. The well telegraphed move initially sent equities higher as market participants were relieved to finally get the first rate rise under their belt. The greenback strengthened on the rate move, keeping pressure on already weak energy prices. Other central banks reacted as countries closely aligned with the US economy raised rates in tandem while the Bank of Japan created more monetary policy divergence by adding more stimulus. As the Fed rate hike sank in, stocks sold off into the weekend and for the week the DJIA ended down 0.8%, the S&P fell 0.3%, and the Nasdaq lost 0.2%.
After the Fed spent the last year talking about rate liftoff, it finally happened on Wednesday. A 25 basis point hike took the key rate off of the zero bound where it has been sitting since December 2008. Chair Yellen said that a rate rise acknowledges that considerable progress has been made in the economic recovery. Yellen managed to keep the rate decision collegial, getting a unanimous vote in support of the hike, and supporting it with a mostly dovish statement. The Fed specified that the rate hike path will be "gradual," maintaining its median 'dot chart' forecast for about four more rate hikes in 2016.
US Treasury markets saw sellers emerge ahead of the FOMC announcement. On Tuesday the 2-year yield backed up to 1.00% for the first time since 2010 and the 10-year rate consolidated around 2.30%. By Friday though, a post-FOMC sell off in equities helped push yields lower and resulted in a flatter US curve. The benchmark 10-year finished the week some 12 basis points below pre FOMC levels.
Manufacturing continued to be a sore spot for the US economy. The December Philadelphia Fed Business Outlook fell to its lowest level in two years. The Markit Manufacturing PMI reading declined with its new orders component registers the weakest reading since 2009. November industrial production steepened its sequential slide and the October was revised lower. On a positive note, US housing starts in November rebounded from a seven-month low and permits surged to a five-month high. November marked the eighth straight month that starts remained above 1 million units, the longest stretch since 2007 and growth was seen in the single family segments.
Other central banks reacted to the historic Fed liftoff from the zero bound. The day after the Fed move, the Mexico central bank raised its rate by 25 basis points to 3.25%. The Banxico said the rate move was aimed at preventing further peso depreciation and that it would focus on relative monetary policy stance with the US. The Chile and Colombia central banks also raised rates by a quarter point each. Meanwhile, the Bank of Japan highlighted the ongoing theme of monetary policy divergence by unexpectedly announcing a ¥300B boost to its ETF purchase program on Friday.
Political turmoil in Brazil spilled into the financial markets when Fitch cut its sovereign rating to junk, matching a downgrade by S&P earlier this month. The announcement was wrapped around continued soft economic data and a growing political crisis in which President Rousseff faces impeachment and the finance minister is said to be on the way out. In neighboring Argentina, new President Macri lifted long standing currency controls, effectively resulting in a devaluation of the currency and sending it lower by ~28% against the US Dollar.
After announcing a tentative deal early in the week, the US Congress moved to pass a $1.1T omnibus spending bill on Friday. House Republican and Democrat leaders scraped together enough votes to pass the compromise bill and the Senate followed suit. One notable feature of the bill is the repeal of the ban on US crude oil exports, which was traded for authorizing a five year extension of solar tax credits. Solar energy stocks performed very well on this development, even as the broader energy sector showed weakness again as crude oil plumbed new lows.
Oil prices came into the week sitting near a 7-year low around $35/bbl and continued to drift lower with no relief. News that Congress lift the oil export ban imposed four decades ago was more than offset by a surprise build to US oil inventories. WTI finished the week below $35 and is closing in on the December 2008 low of $32.40. Brent is even closer to the previous low of $36.20 hit in late 2008. Natural gas fared no better, continuing to hit fresh 13-year lows below $2.00 as the week wore on and unseasonably warm weather continued in the eastern part of North American.
Cheap fuel costs have failed to spark the economy and the DJ Transportation Average has remained a bugaboo for many investors. Knight Transportation gapped lower after cutting its Q4 outlook, weighing on trucking and logistics competitors. On Friday, FedEx quickly gave back all of the gains it made on its Q2 earnings report earlier in the week. Shares of UPS and FDX came under substantial pressure follow a report that Amazon is in talks to lease 20 cargo jets from Boeing so that it can launch its own air-cargo service to handle more of its own shipments. By Friday, the DJ Transportation Average fell to a new 2015 low below 7400, further spooking some old-school Dow theorists.
Various US corporations offered up initial FY16 forecasts, and some were not very well received. MMM shares slid after cutting this year's forecast and guiding next year towards the low end of consensus expectations. Kennametal dropped aggressively after management guided FY16 earnings down as much as 60%. Oracle continued growth in the cloud market failed to impress investors who sold off shares following its Q2 earnings report.
On Tuesday, embattled drug-maker Valeant announced a deal to distribute some of its medicines at a discount through Walgreens pharmacies. The very next day Valeant reset investors' expectations by cutting its 2015 forecast and guiding FY16 earnings below expectations. Shares surged more than 15% as the company looked to put to bed weeks of controversy surrounding alleged questionable business practices.
Deal flow slowed this week but there were a few notable developments. Newell Rubbermaid agreed to buy Jarden for $60/share in a cash-and-stock deal valued around $15 billion. For each Jarden share, Newell will pay $21 in cash and 0.862 of a share in Newell. The companies pegged the deal's total value at $15.4 billion, when including the convertible debt on Jarden's balance sheet. Avon confirmed a long speculated tie up when private equity firm Cerberus agreed to acquire an 80% stake in Avon North America, separating it from its parent company. Cerberus also agreed to take a 16.6% stake in the parent company. As part of Avon's strategic restructuring management confirmed they were suspending the quarterly dividend. The regulatory reviews of the Baker Hughes Halliburton deal continued to push ahead slowly. Both European and US regulators extended their decision time frames into next year.
Saturday, December 12, 2015
Barrons Saturday summary
Barrons Saturday summary: Positive on XL and retailers; cautious on KMI
Cover story: Ten market strategists surveyed by Barron's see moderate gains for the market in the year ahead; Based on their mean forecast, the S&P 500 will end next year at 2220, up 10 percent from Friday's close of 2012; Overall, the group was more cautious than in recent years past; Top picks include AVGO, GILD, V, GOOGL, COF, ROST, DIS, MMM.
Features:
1) Positive on M, JWN, RL, BURL: Shares of retailers have been marked down as the sector struggles, but they are likely to rebound next year because of strong long-term prospects;
2) Cautious on KMI: Oil- and gas-pipeline operator has long been considered the industry bellwether, but now that its business model has been proved flawed, industry bulls argue it is an outlier because of its high level of debt;
3) Positive on OAK, FMC, EQC, TRCO, HRG, ENR, CVA, ATU, KRNY, CKEC: Companies are Barron's favorite small- and mid-cap picks for 2016, with some on the list having potential upside of as much as 40-50%;
4) Positive on XL: Shares of global insurer, which has pared down its operations and raised fresh capital in the wake of the financial crisis, could rise by as much as 25% next year.
Tech Trader: Tiernan Ray looks at activist investing in the tech sector, noting that such investors "have no real ideas to contribute with regard to the development of great products and services, only tactics for creating noise to boost stock prices."
Trader: The cost of capital is going up for corporate America, says Peter Boockvar of The Lindsey Group, along with tightening credit and monetary policy, and weaker earnings; Cautious on MW: Debt is a problem for clothing retailer following its acquisition of struggling Jos. A Bank, but the core Men's Wearhouse brand remains strong, and spinning off or shrinking Jos. A Bank could improve the balance sheet; Cautious on TEVA: Company still has to prove that asthma drug Reslizumab is safe for teenagers, but with a strong pipeline and the growing focus in the U.S. on price-friendly generics, shares could rise; - Anglo American: Shares have plunged by more than 70% since last spring amid an overall commodities rout, but more near-term risk means investors should stay away despite the low price.
Interview: Ayako Hirota Weissman, co-manager, Horizon Asia Opportunity, likes Minor International, Genting Hong Kong, and Internet Initiative Japan.
Profile: Chuck Bath, portfolio manager, Diamond Hill Large Cap fund, uses a forecasting technique to determine a company's intrinsic value (top 10 holdings: AIG, ABT, C, PFE, PG, UTX, JPM, MS, SYY, MDT).
Follow-Up: Cautious on DIS: Company's new Star Wars movie is expected to be a major hit, but anything short of a stellar opening weekend could send the shares down; Cautious on JNS: The departure of head of fundamental fixed income Gibson Smith is a huge blow to the firm, where bond outflows could begin just as the equities division has turned a corner.
European Trader: Positive on Unipol Group: Investors could see a windfall if financial-services holding company completes the simplification of its shareholding structure, while a tie-up with UnipolSai Assicurazioni could also boost shares.
Asian Trader: Cautious on Lufax, Yirendai: Chinese peer-to-peer lending firms are "unicorns," and the sector has huge potential in China, but investors should be wary because they are managed with the same opacity that has created concerns about other Chinese companies.
Emerging Markets: "Market-friendly political change may be happening fast in Latin America, but earnings at many companies won't catch up for a while in Argentina and Brazil."
Commodities: Copper prices are already down because of lower demand in China, but some industry observers say a flood of new supply will drive prices down even further.
Streetwise: GMCR's announcement it would be acquired by JAB Holding is good news for shareholders, but continues a ten-plus-year trend of stock market shrinkage.
Friday, December 11, 2015
Global Equities Drown in a Sea of Crude
TradeTheNews.com Weekly
Market Update: Global Equities Drown in a Sea of Crude
Fri, 11 Dec 2015 16:02 PM EST
OPEC's failure to do anything about the global crude glut drove oil prices to six-year lows this week. With prices falling, equity markets were dragged lower by a hard-hit energy sector. Moreover, the long-prophesied high-yield debt meltdown may be underway, as a notable fund specializing in junk bonds froze investor holdings and said it would wind down, causing a major selloff in HYG. Meanwhile, the FOMC meets next week and Fed fund futures are still predicting am ~80% probability of a small rate increase. Nevertheless, US Treasury markets saw aggressive buying through week's end after digesting a fair amount of new supply. Waning risk appetite pushed the US 30- and 10-year yields back below their 200-day moving averages by Friday. For the week the DJIA lost 3.3%, S&P500 dropped 3.8%, and the Nasdaq fell 4.1%.
WTI crude prices fell nearly 10% this week, dropping below $36, within striking distance of the January 2009 low near $33/bbl. Brent slipped 12% to below $38, even closer to its December 2008 bottom around $37/bbl. The primary catalyst was OPEC's muddled and contentious summit last week, with no action taken to stem the glut. In a report out on Friday, the IEA warned the supply glut would last until late 2016. With oil marking six-year lows, the Canadian Dollar has hit 11-year lows against the greenback, with USD/CAD at 1.3700. The ruble has fallen to 70.4 to the dollar, pips away from the August low of 70.8, with real worries about the Russian economy setting in.
Another big casualty has been shaky US high-yield debt markets. On Thursday evening, Third Avenue Management, a large mutual fund specializing in high-yield bonds, blocked investors from withdrawing funds, citing difficult trading conditions for its securities. The move highlights longstanding fears that too much money has piled into risky junk bonds. Third Avenue manages a total of $8 billion, and the remaining assets in the fund will be put into a liquidating trust and sold off gradually. The iShares HYG high-yield fund dropped 2% on Friday to four-year lows, extending the run lower that began in spring.
The BoE again left interest rates unchanged at 0.5%. The MPC voted 8-1 for no change, predicting that inflation would stay below 1% until the second half of next year. McCafferty was the dissenter to the decision for the fourth time, voting for a quarter-point rate increase. The minutes showed policymakers concentrated on the continuing subdued inflation environment. GPB/USD moved off the 1.5180 area to test the key level of 1.5110 on the announcement, but then rapidly headed back to 1.5180. GBP/USD notched three-week highs above 1.5230 on Friday as the dollar weakened.
The yuan was allowed to weaken to a four-month low this week, as USD/CNY slipped lower to levels last seen during the summer China FX panic. On Thursday, the PBoC set the midpoint rate at 6.4236 per dollar, 0.15% weaker than the previous fix, prompting the currency to open at its lowest level since August's 4% devaluation. Some traders suggested the bank was teeing up another devaluation, however on Friday the PBoC said it would alter its yuan management as part of Beijing's continuing push towards the goal of a free-floating currency. The PBoC said it would move to measure the yuan's value against currency basket rather than a peg to the dollar, for "better exchange rate stability."
Japan disclosed some brighter economic data this week, contrasting with an ugly Chinese trade report. Japan dodged a technical recession as the final Q3 GDP reading was revised up to +0.3% from the -0.2% preliminary showing. Separately, October leading indicator machine orders grew by over 10% y/y to a four-month high. With the somewhat brighter outlook, expectations for another round of BoJ easing were repriced as the Nikkei wrote that support for more measures at the bank was waning. The China November trade balance came in at a four-month low, with the decline in exports bigger than expected at -6.8% v -5.0%e while imports dropped a little less than expected at -8.7% v -11.9%e. The commodity meltdown certainly was unabated this week, however China November iron ore imports rose 22% and copper imports rose 9.5%.
South Africa was plunged into FX purgatory this week by the government's rash response to the ratings agencies. On December 4th, Fitch cut its assessment of South African public debt to just one notch above junk, and Standard & Poor's revised its outlook on SA's BBB- to negative. Both cited concerns about South Africa's slow rate of economic growth and spiraling public debt. Instead of heeding the warning, President Zuma compounded the damage by firing Finance Minister Nene and replacing him with an obscure MP. ZAR has been slipping lower against the dollar all year, but the pace has accelerated rapidly in December, with USD/ZAR moving to 15.80 from 14.00 at the beginning of the month, most of which accrued after Nene's demotion.
Commodity-producers were under pressure this week as many firms struggled to reconcile depressed stock prices with exaggerated dividends. Kinder Morgan shares swooned last week as investors predicted a dividend cut, and on Tuesday management slashed the payout by 76%, an even bigger reduction than many expected. Freeport-McMoRan suspended its dividend, further reduced its oil & gas capex and curtailed its copper mining operations in response to continued declines in commodity prices. The company said it was increasing curtailments in copper production to about 350 million pounds from 250 million. As investors began to question the reliability of dividends even from the stalwart oil majors, Chevron's CEO came out to say maintaining the company's nearly 5% dividend is the number one priority.
Yahoo scrapped its long-planned spinoff of shares in Alibaba after pressure from investors concerned about the tax risks of the transaction. Yahoo will instead explore a plan to spin-off assets and liabilities other than the Alibaba stake. The move comes after Yahoo's board convened last week to consider options for the company's future, including whether to press ahead with the Alibaba divestiture. Recall that activist shareholder Starboard last month called for the company to drop the Alibaba spinoff and instead sell its Web businesses.
DuPont and Dow Chemical agreed to a $130 billion, all-stock merger of equals. The companies took pains to highlight that the merged entity would rapidly be split into three publically traded companies, each of which would aggregate their respective agriculture, materials and specialty products assets. Under the terms of the deal, Dow shareholders will receive a fixed exchange ratio of 1.00 share of DowDuPont for each Dow share, and DuPont shareholders will receive a fixed exchange ratio of 1.282 shares in DowDuPont for each DuPont share, leaving a 50/50 split ownership. Note that Dow will also be consolidating 100% control of its Dow Corning JV with Corning as part of the deal.
In other M&A news, Keurig Green Mountain agreed to be acquired by private equity firm JAB Holding for almost $14 billion. JAB Holding said it offered $92 for each share of Keurig, a whopping 78 percent premium to the stock's prior closing price. Note that Keurig's stock had fallen nearly 61 percent since the beginning of the year, as K-cup sales slumped. CP adjusted its unsolicited offer for Norfolk Southern to $32.86 in cash and 0.451 shares, from $46.72 in cash and 0.348 shares, although this hardly increased the consideration. NSC was unmoved, and said the proposal was still vastly undervalued. Fairchild disclosed that it had received an unsolicited offer valued at $21.70/share, above the $20/share transaction with ON Semiconductor agreed to back in November. Press reports suggested the offer came from China Resources Group.
Fri, 11 Dec 2015 16:02 PM EST
OPEC's failure to do anything about the global crude glut drove oil prices to six-year lows this week. With prices falling, equity markets were dragged lower by a hard-hit energy sector. Moreover, the long-prophesied high-yield debt meltdown may be underway, as a notable fund specializing in junk bonds froze investor holdings and said it would wind down, causing a major selloff in HYG. Meanwhile, the FOMC meets next week and Fed fund futures are still predicting am ~80% probability of a small rate increase. Nevertheless, US Treasury markets saw aggressive buying through week's end after digesting a fair amount of new supply. Waning risk appetite pushed the US 30- and 10-year yields back below their 200-day moving averages by Friday. For the week the DJIA lost 3.3%, S&P500 dropped 3.8%, and the Nasdaq fell 4.1%.
WTI crude prices fell nearly 10% this week, dropping below $36, within striking distance of the January 2009 low near $33/bbl. Brent slipped 12% to below $38, even closer to its December 2008 bottom around $37/bbl. The primary catalyst was OPEC's muddled and contentious summit last week, with no action taken to stem the glut. In a report out on Friday, the IEA warned the supply glut would last until late 2016. With oil marking six-year lows, the Canadian Dollar has hit 11-year lows against the greenback, with USD/CAD at 1.3700. The ruble has fallen to 70.4 to the dollar, pips away from the August low of 70.8, with real worries about the Russian economy setting in.
Another big casualty has been shaky US high-yield debt markets. On Thursday evening, Third Avenue Management, a large mutual fund specializing in high-yield bonds, blocked investors from withdrawing funds, citing difficult trading conditions for its securities. The move highlights longstanding fears that too much money has piled into risky junk bonds. Third Avenue manages a total of $8 billion, and the remaining assets in the fund will be put into a liquidating trust and sold off gradually. The iShares HYG high-yield fund dropped 2% on Friday to four-year lows, extending the run lower that began in spring.
The BoE again left interest rates unchanged at 0.5%. The MPC voted 8-1 for no change, predicting that inflation would stay below 1% until the second half of next year. McCafferty was the dissenter to the decision for the fourth time, voting for a quarter-point rate increase. The minutes showed policymakers concentrated on the continuing subdued inflation environment. GPB/USD moved off the 1.5180 area to test the key level of 1.5110 on the announcement, but then rapidly headed back to 1.5180. GBP/USD notched three-week highs above 1.5230 on Friday as the dollar weakened.
The yuan was allowed to weaken to a four-month low this week, as USD/CNY slipped lower to levels last seen during the summer China FX panic. On Thursday, the PBoC set the midpoint rate at 6.4236 per dollar, 0.15% weaker than the previous fix, prompting the currency to open at its lowest level since August's 4% devaluation. Some traders suggested the bank was teeing up another devaluation, however on Friday the PBoC said it would alter its yuan management as part of Beijing's continuing push towards the goal of a free-floating currency. The PBoC said it would move to measure the yuan's value against currency basket rather than a peg to the dollar, for "better exchange rate stability."
Japan disclosed some brighter economic data this week, contrasting with an ugly Chinese trade report. Japan dodged a technical recession as the final Q3 GDP reading was revised up to +0.3% from the -0.2% preliminary showing. Separately, October leading indicator machine orders grew by over 10% y/y to a four-month high. With the somewhat brighter outlook, expectations for another round of BoJ easing were repriced as the Nikkei wrote that support for more measures at the bank was waning. The China November trade balance came in at a four-month low, with the decline in exports bigger than expected at -6.8% v -5.0%e while imports dropped a little less than expected at -8.7% v -11.9%e. The commodity meltdown certainly was unabated this week, however China November iron ore imports rose 22% and copper imports rose 9.5%.
South Africa was plunged into FX purgatory this week by the government's rash response to the ratings agencies. On December 4th, Fitch cut its assessment of South African public debt to just one notch above junk, and Standard & Poor's revised its outlook on SA's BBB- to negative. Both cited concerns about South Africa's slow rate of economic growth and spiraling public debt. Instead of heeding the warning, President Zuma compounded the damage by firing Finance Minister Nene and replacing him with an obscure MP. ZAR has been slipping lower against the dollar all year, but the pace has accelerated rapidly in December, with USD/ZAR moving to 15.80 from 14.00 at the beginning of the month, most of which accrued after Nene's demotion.
Commodity-producers were under pressure this week as many firms struggled to reconcile depressed stock prices with exaggerated dividends. Kinder Morgan shares swooned last week as investors predicted a dividend cut, and on Tuesday management slashed the payout by 76%, an even bigger reduction than many expected. Freeport-McMoRan suspended its dividend, further reduced its oil & gas capex and curtailed its copper mining operations in response to continued declines in commodity prices. The company said it was increasing curtailments in copper production to about 350 million pounds from 250 million. As investors began to question the reliability of dividends even from the stalwart oil majors, Chevron's CEO came out to say maintaining the company's nearly 5% dividend is the number one priority.
Yahoo scrapped its long-planned spinoff of shares in Alibaba after pressure from investors concerned about the tax risks of the transaction. Yahoo will instead explore a plan to spin-off assets and liabilities other than the Alibaba stake. The move comes after Yahoo's board convened last week to consider options for the company's future, including whether to press ahead with the Alibaba divestiture. Recall that activist shareholder Starboard last month called for the company to drop the Alibaba spinoff and instead sell its Web businesses.
DuPont and Dow Chemical agreed to a $130 billion, all-stock merger of equals. The companies took pains to highlight that the merged entity would rapidly be split into three publically traded companies, each of which would aggregate their respective agriculture, materials and specialty products assets. Under the terms of the deal, Dow shareholders will receive a fixed exchange ratio of 1.00 share of DowDuPont for each Dow share, and DuPont shareholders will receive a fixed exchange ratio of 1.282 shares in DowDuPont for each DuPont share, leaving a 50/50 split ownership. Note that Dow will also be consolidating 100% control of its Dow Corning JV with Corning as part of the deal.
In other M&A news, Keurig Green Mountain agreed to be acquired by private equity firm JAB Holding for almost $14 billion. JAB Holding said it offered $92 for each share of Keurig, a whopping 78 percent premium to the stock's prior closing price. Note that Keurig's stock had fallen nearly 61 percent since the beginning of the year, as K-cup sales slumped. CP adjusted its unsolicited offer for Norfolk Southern to $32.86 in cash and 0.451 shares, from $46.72 in cash and 0.348 shares, although this hardly increased the consideration. NSC was unmoved, and said the proposal was still vastly undervalued. Fairchild disclosed that it had received an unsolicited offer valued at $21.70/share, above the $20/share transaction with ON Semiconductor agreed to back in November. Press reports suggested the offer came from China Resources Group.
Saturday, December 5, 2015
Barron's Saturday summary
TradeTheNews.com Barron's Saturday summary: Positive on AA; Cautious on KMI
Cover story: Barron's picks its 10 favorite stocks for 2016 (Positive on AMCX, AAPL, CELG, CVS, DAL, DFS, EA, FL, GM, MHK); Next year, the broad stock market is likely to do better than in 2015; "Assuming similar growth next year, with a steady price/earnings ratio and 2% in dividends, stock investors could end up with a total return in the high-single digits."
Features:
1) Cautious on KMI: Shares are down amid concerns the energy pipeline giant may have to cut its quarterly dividend of 51 cents to boost its leveraged balance sheet, a move that would be a major comedown;
2) Positive on AA: Shares took a hit following aluminum giant's announcement it would spin off value-added product divisions next year, but the market overreaction presents an opportunity to buy shares at a discount of more than 35% to intrinsic value;
3) Picks from investing professionals at this year's Sohn London conference (buy HMHC, MJN, Rolls Royce Holdings, TomTom International; sell ERIC, PFPT).
Tech Trader: Cautious on FIT: Maker of activity tracking bracelets "has red flags that make it a risky proposition," and a lockup expiration this month could dump more shares on the market if executives and early investors abandon ship.
Trader: "The market looks to be solidly inside the range it has inhabited all year, but the high number of huge daily moves this year and steadily weakening breadth suggest that all isn't as well as it looks"; Positive on MOS: The fertilizer sector has taken a hit, but company's valuation seems attractive, and a small rise in the global economy could revive shares; Positive on SKX: Shares are down, but the drop seems an overreaction to robust growth in the past few years, and the lower price offers investors a good entry point. Interview: Bob Michele of JPMorgan Asset Management is hedging currency exposure in much of his international portfolio and favors securities further out on the yield curve.
Profile: Stephen Peak, portfolio manager, Henderson European Focus fund, has guided it to returns of an average of 14% a year since its 2001 inception (top 10 holdings: BG, Nokia, ALU, ROG, AZN, TEVA, BAR, ASML, 7PI, NHH).
Follow-Up: To make China's currency more widely used, central banks, sovereign wealth funds, and private investors must stockpile more yuan assets as the country liberalizes its markets.
European Trader: Positive on Enel, LafargeHolcim: Companies are undervalued, but Katrina Dudley of the Franklin Mutual European fund says they are well-run cyclical businesses that have restructured and should benefit from a European recovery.
Asian Trader: Positive on LG Chem, Samsung SDI: Korean battery makers should gain as electric cars increasingly become mainstream, especially in countries such as China that are trying to curb pollution.
Emerging Markets: Things are looking bad in Greece, where stocks have fallen about 30% this year in what one observer calls a "dead market" that will have serious problems attracting investment.
Commodities: Heavy rains shortened the cotton-growing season and limited high-quality supply, making it one of the few commodities whose price gained in 2015.
Streetwise: Cautious on WLL: Shares have fallen 57% this year, but its bonds have held up, and shares could be worth acquiring because the company is cutting costs and will benefit when oil prices go up again.
Cover story: Barron's picks its 10 favorite stocks for 2016 (Positive on AMCX, AAPL, CELG, CVS, DAL, DFS, EA, FL, GM, MHK); Next year, the broad stock market is likely to do better than in 2015; "Assuming similar growth next year, with a steady price/earnings ratio and 2% in dividends, stock investors could end up with a total return in the high-single digits."
Features:
1) Cautious on KMI: Shares are down amid concerns the energy pipeline giant may have to cut its quarterly dividend of 51 cents to boost its leveraged balance sheet, a move that would be a major comedown;
2) Positive on AA: Shares took a hit following aluminum giant's announcement it would spin off value-added product divisions next year, but the market overreaction presents an opportunity to buy shares at a discount of more than 35% to intrinsic value;
3) Picks from investing professionals at this year's Sohn London conference (buy HMHC, MJN, Rolls Royce Holdings, TomTom International; sell ERIC, PFPT).
Tech Trader: Cautious on FIT: Maker of activity tracking bracelets "has red flags that make it a risky proposition," and a lockup expiration this month could dump more shares on the market if executives and early investors abandon ship.
Trader: "The market looks to be solidly inside the range it has inhabited all year, but the high number of huge daily moves this year and steadily weakening breadth suggest that all isn't as well as it looks"; Positive on MOS: The fertilizer sector has taken a hit, but company's valuation seems attractive, and a small rise in the global economy could revive shares; Positive on SKX: Shares are down, but the drop seems an overreaction to robust growth in the past few years, and the lower price offers investors a good entry point. Interview: Bob Michele of JPMorgan Asset Management is hedging currency exposure in much of his international portfolio and favors securities further out on the yield curve.
Profile: Stephen Peak, portfolio manager, Henderson European Focus fund, has guided it to returns of an average of 14% a year since its 2001 inception (top 10 holdings: BG, Nokia, ALU, ROG, AZN, TEVA, BAR, ASML, 7PI, NHH).
Follow-Up: To make China's currency more widely used, central banks, sovereign wealth funds, and private investors must stockpile more yuan assets as the country liberalizes its markets.
European Trader: Positive on Enel, LafargeHolcim: Companies are undervalued, but Katrina Dudley of the Franklin Mutual European fund says they are well-run cyclical businesses that have restructured and should benefit from a European recovery.
Asian Trader: Positive on LG Chem, Samsung SDI: Korean battery makers should gain as electric cars increasingly become mainstream, especially in countries such as China that are trying to curb pollution.
Emerging Markets: Things are looking bad in Greece, where stocks have fallen about 30% this year in what one observer calls a "dead market" that will have serious problems attracting investment.
Commodities: Heavy rains shortened the cotton-growing season and limited high-quality supply, making it one of the few commodities whose price gained in 2015.
Streetwise: Cautious on WLL: Shares have fallen 57% this year, but its bonds have held up, and shares could be worth acquiring because the company is cutting costs and will benefit when oil prices go up again.
Friday, December 4, 2015
Fed Headed for Higher Rates, ECB Stays Easy, Terrorism Hits US
TradeTheNews.com Weekly
Market Update: Fed Headed for Higher Rates, ECB Stays Easy, Terrorism Hits US
Fri, 04 Dec 2015 16:13 PM EST
Policy divergence between Europe and the United States was thrown into high relief this week. On Thursday, the ECB extended its QE bond buying program to March 2017 and cut its deposit rate further into negative territory, as President Draghi said that Europe needed more support for longer. Then on Friday, the November US jobs report beat expectations with strength seen across all categories, all but requiring the Fed to hike rates at its policy meeting in two weeks. The other major financial event was the OPEC summit, where the cartel acknowledged the reality that its prior 30M bpd production ceiling was clearly being ignored by member states. OPEC refrained from actually setting a new production ceiling, though the organization's President eventually confirmed the current production level is around 31.5M bpd. Markets were forced to digest these key events against the backdrop of a horrific terrorist attack in San Bernardino CA. In a volatile trading week, the S&P500 ended up 0.1% and the DJIA and Nasdaq each gained 0.3%.
The November US jobs report was strong, with the non-farm total of +211K beating expectations and the unemployment rate steady at a seven-year lows of 5.0%. Average hourly earnings saw additional modest gains after a big jump in October. The report was the last big data point ahead of the Fed's two-day policy meeting in two weeks. Ahead of the jobs number, Fed Chair Yellen had said the labor market's progress was healthy enough to boost confidence that the Fed may reach its 2% inflation target soon. Economists at BNP Paribas said that after Friday's report it's "all systems go" for the Fed to raise rates in December.
As expected, the ECB cut its deposit rate another tenth into negative territory, to -0.30% and expanded its QE program. The central bank extended its bond buying program by six months to March 2017 and said it would begin buying regional government bonds, expanding the range of assets it can buy. Markets were apparently disappointed that the ECB failed to boost the monthly purchase amount of €60B, but Draghi defended the measures taken as "adequate." In addition, the ECB said it would also commence reinvesting principal as bonds mature, a move that Draghi later explained would add €680 in liquidity to the system by 2019 in a speech on Friday
The ECB announcements resulted in volatile price action across a variety of asset classes as markets appeared underwhelmed after weeks of buildup into the additional stimulus measures. EUR/USD was testing seven-month lows around 1.0540 in the lead-up to the decision but quickly took out 1.0900 as Draghi rolled out the new measures during the press conference. By mid-day on Thursday, EUR/USD topped out around 1.0980, a one-month high, before trading back below 1.0900 through week's end. Interest rates popped globally with several markets experiencing the sharpest back up in yields in many years. The German 2-year yield rose some 15 basis points after the ECB announcement while UST yields climbed as well. Equities were hit hard in Europe and pressured in the US as well until the solid November employment report sent US Indices surging on Friday.
Australia's central bank kept rates unchanged for the seventh straight meeting and largely reiterated the sentiment from last month's policy statement. The RBA still sees prospects for an improvement in economic conditions having firmed, inflation consistent with the target over the next 1-2 years, and AUD currency adjusting to commodity decline. The biggest change in the language was the admission of a large decline in capital spending in the mining industry.
Global industrial production PMI data was very mixed, with China remaining weak, the US looking soft and Europe possibly doing alright. The November Chicago PMI and Dallas Fed manufacturing indices were pretty soft, with the Chicago PMI back below 50 after seeing a move higher in October. Meanwhile, the November ISM manufacturing index sank below 50 into contraction, missing expectations and falling to its lowest level since June 2009. China's official manufacturing PMI was in contraction for the fourth month in a row, and the index marked a three-year low. Further slowdown in Key components of New Export Orders and Input prices revealed continued softness of external demand and also disinflationary pressures. Euro zone, Germany and France November manufacturing PMI indices met or beat expectations and moved up from October levels.
As expected, the International Monetary Fund has added the Chinese yuan to its Special Drawing Rights (SDR) basket of currencies. The yuan joins the US dollar, UK pound, Japanese yen and the euro in the basket, marking a major step toward normalization of China's position as a leading economic power, however analysts caution that it represents the IMF's opinion about which currencies are safe for asset managers to hold. Asset managers may end up seeing the IMF's decision as mainly political. Either way, it is also an important signal that China is ready to end its strategy of rapid investment-driven catch-up growth and further work towards raising domestic consumption.
The annual OPEC summit was among the most contentious in years. Saudi Arabia is now approximately 1.5 years into its campaign to lower oil prices to crush the US shale industry and consolidate its market share, and pressure was building on the Saudis to cut output while even inside the Kingdom there was said to be disagreement about what strategy to pursue. In the lead-up to the meeting, Iran argued that a majority of OPEC members supported an output cut, but other Gulf Arab countries stood with the Saudis (at the same time, Iran was insisting it did not need permission from OPEC to increase crude production). After an extended closed door meeting on Friday, OPEC delegates emerged to say that they would leave production levels unchanged (at the "actual" 31.5M bbd level, above the prior 30M bpd ceiling). The Secretary General said that they wanted to wait and see how the market develops over the next six months as Indonesia is welcomed into OPEC and Iran begins to ramp up its oil production as sanctions are lifted. WTI crude closed out the week around the $40/bbl mark.
Brazil's vast corruption scandal - over 140 businessmen and a host of politicians have been charged with bribery and money laundering - keeps penetrating higher levels of the government. On Wednesday, Brazil's lower house initiated impeachment proceedings against President Rousseff, accusing her Treasury of repeatedly borrowing money from government banks without legislative authority, in an attempt to mask deficits - rather than outright bribery or corruption. Within a month deputies must decide whether to pass the case to the senate, which requires a two-thirds majority. Senators would then have 180 days to try the president.
The November US auto sales growth was pretty weak. General Motors and Ford both widely missed expectations: Ford sales were +0.3% (v 3.2% expected) and GM's were +1.5% (+2.9% expected). Fiat Chrysler got closer to the mark with +3% sales (v +3.2% expected). Meanwhile, Volkswagen's sales declined 25% in the month, in the wake of the emissions cheating scandal.
There were no big M&A deals this week though some may be brewing. Avon shares rose on report that it is in talks to sell its North American business to Cerberus as soon as this month. Biotech name Relypsa shares surged on Friday on an unconfirmed report that Merck may be evaluating a bid.
Fri, 04 Dec 2015 16:13 PM EST
Policy divergence between Europe and the United States was thrown into high relief this week. On Thursday, the ECB extended its QE bond buying program to March 2017 and cut its deposit rate further into negative territory, as President Draghi said that Europe needed more support for longer. Then on Friday, the November US jobs report beat expectations with strength seen across all categories, all but requiring the Fed to hike rates at its policy meeting in two weeks. The other major financial event was the OPEC summit, where the cartel acknowledged the reality that its prior 30M bpd production ceiling was clearly being ignored by member states. OPEC refrained from actually setting a new production ceiling, though the organization's President eventually confirmed the current production level is around 31.5M bpd. Markets were forced to digest these key events against the backdrop of a horrific terrorist attack in San Bernardino CA. In a volatile trading week, the S&P500 ended up 0.1% and the DJIA and Nasdaq each gained 0.3%.
The November US jobs report was strong, with the non-farm total of +211K beating expectations and the unemployment rate steady at a seven-year lows of 5.0%. Average hourly earnings saw additional modest gains after a big jump in October. The report was the last big data point ahead of the Fed's two-day policy meeting in two weeks. Ahead of the jobs number, Fed Chair Yellen had said the labor market's progress was healthy enough to boost confidence that the Fed may reach its 2% inflation target soon. Economists at BNP Paribas said that after Friday's report it's "all systems go" for the Fed to raise rates in December.
As expected, the ECB cut its deposit rate another tenth into negative territory, to -0.30% and expanded its QE program. The central bank extended its bond buying program by six months to March 2017 and said it would begin buying regional government bonds, expanding the range of assets it can buy. Markets were apparently disappointed that the ECB failed to boost the monthly purchase amount of €60B, but Draghi defended the measures taken as "adequate." In addition, the ECB said it would also commence reinvesting principal as bonds mature, a move that Draghi later explained would add €680 in liquidity to the system by 2019 in a speech on Friday
The ECB announcements resulted in volatile price action across a variety of asset classes as markets appeared underwhelmed after weeks of buildup into the additional stimulus measures. EUR/USD was testing seven-month lows around 1.0540 in the lead-up to the decision but quickly took out 1.0900 as Draghi rolled out the new measures during the press conference. By mid-day on Thursday, EUR/USD topped out around 1.0980, a one-month high, before trading back below 1.0900 through week's end. Interest rates popped globally with several markets experiencing the sharpest back up in yields in many years. The German 2-year yield rose some 15 basis points after the ECB announcement while UST yields climbed as well. Equities were hit hard in Europe and pressured in the US as well until the solid November employment report sent US Indices surging on Friday.
Australia's central bank kept rates unchanged for the seventh straight meeting and largely reiterated the sentiment from last month's policy statement. The RBA still sees prospects for an improvement in economic conditions having firmed, inflation consistent with the target over the next 1-2 years, and AUD currency adjusting to commodity decline. The biggest change in the language was the admission of a large decline in capital spending in the mining industry.
Global industrial production PMI data was very mixed, with China remaining weak, the US looking soft and Europe possibly doing alright. The November Chicago PMI and Dallas Fed manufacturing indices were pretty soft, with the Chicago PMI back below 50 after seeing a move higher in October. Meanwhile, the November ISM manufacturing index sank below 50 into contraction, missing expectations and falling to its lowest level since June 2009. China's official manufacturing PMI was in contraction for the fourth month in a row, and the index marked a three-year low. Further slowdown in Key components of New Export Orders and Input prices revealed continued softness of external demand and also disinflationary pressures. Euro zone, Germany and France November manufacturing PMI indices met or beat expectations and moved up from October levels.
As expected, the International Monetary Fund has added the Chinese yuan to its Special Drawing Rights (SDR) basket of currencies. The yuan joins the US dollar, UK pound, Japanese yen and the euro in the basket, marking a major step toward normalization of China's position as a leading economic power, however analysts caution that it represents the IMF's opinion about which currencies are safe for asset managers to hold. Asset managers may end up seeing the IMF's decision as mainly political. Either way, it is also an important signal that China is ready to end its strategy of rapid investment-driven catch-up growth and further work towards raising domestic consumption.
The annual OPEC summit was among the most contentious in years. Saudi Arabia is now approximately 1.5 years into its campaign to lower oil prices to crush the US shale industry and consolidate its market share, and pressure was building on the Saudis to cut output while even inside the Kingdom there was said to be disagreement about what strategy to pursue. In the lead-up to the meeting, Iran argued that a majority of OPEC members supported an output cut, but other Gulf Arab countries stood with the Saudis (at the same time, Iran was insisting it did not need permission from OPEC to increase crude production). After an extended closed door meeting on Friday, OPEC delegates emerged to say that they would leave production levels unchanged (at the "actual" 31.5M bbd level, above the prior 30M bpd ceiling). The Secretary General said that they wanted to wait and see how the market develops over the next six months as Indonesia is welcomed into OPEC and Iran begins to ramp up its oil production as sanctions are lifted. WTI crude closed out the week around the $40/bbl mark.
Brazil's vast corruption scandal - over 140 businessmen and a host of politicians have been charged with bribery and money laundering - keeps penetrating higher levels of the government. On Wednesday, Brazil's lower house initiated impeachment proceedings against President Rousseff, accusing her Treasury of repeatedly borrowing money from government banks without legislative authority, in an attempt to mask deficits - rather than outright bribery or corruption. Within a month deputies must decide whether to pass the case to the senate, which requires a two-thirds majority. Senators would then have 180 days to try the president.
The November US auto sales growth was pretty weak. General Motors and Ford both widely missed expectations: Ford sales were +0.3% (v 3.2% expected) and GM's were +1.5% (+2.9% expected). Fiat Chrysler got closer to the mark with +3% sales (v +3.2% expected). Meanwhile, Volkswagen's sales declined 25% in the month, in the wake of the emissions cheating scandal.
There were no big M&A deals this week though some may be brewing. Avon shares rose on report that it is in talks to sell its North American business to Cerberus as soon as this month. Biotech name Relypsa shares surged on Friday on an unconfirmed report that Merck may be evaluating a bid.
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