Weekly Market Update: Risk Appetite Dries Up as Trade War and Tech Worries Mount
Global stock markets took a significant step back this week as investors were unable to look past a growing number of risks to equity valuations. Technology shares opened under significant pressure when Facebook found itself embroiled in a major controversy, leading many to call for the resignation of CEO Zuckerberg amid intense scrutiny from government officials in Europe as well as in Washington. The consternation surrounding a looming trade war only intensified after President Trump followed through and announced a swath of tariffs aimed at $60B in Chinese imports. The Chinese responded in kind, launching what appeared to be much more modest $3B retaliation package against the initial steel and aluminum tariffs imposed earlier this month, but suggested more reciprocal measures may be announced soon. Wednesday, the US Fed raised rates as expected, but the median forecast for the Fed funds rate for both 2019 and 2020 were ratcheted significantly higher. The next day, the BOE hinted that its next rate hike is likely to come in May. President Trump made fresh headlines on Friday by announcing another change to his inner circle, bringing on hawk John Bolton to head up his national security team. He also signed the omnibus spending bill, but not before deriding Congress for the legislation's perceived shortfalls in his eyes.
Indicators in global bond markets offered some caution also: A global flight away from risk pushed up Treasury prices and weighed on yields. European yields touched some of the lowest levels in months, despite the BOE indicating it is indeed pulling forward its next rate hike. Treasury prices rallied despite the perception of a somewhat hawkish Fed, pushing the 10-year yield back towards last month's lows. LIBOR spreads continued to rise, along with the LIBOR-OIS spread widening to levels not seen since the European financial crisis, signaling potential issues affecting overnight funding markets. The VIX jumped back above 25 as the S&P slid back towards the Feb lows and the 200-day moving average. The US dollar fell to a 16-month low against the Japanese Yen while rallying modestly against other currencies. Gold prices jumped back towards the Feb highs, testing $1,350 once again. Sector flows were clearly defensive in nature with REITs, utilities, and energy names holding up relatively well to the carnage seen in technology. For the week, the S&P500 tumbled nearly 6%, the DJIA dropped 5.7%, and the Nasdaq fell 6.5%.
Corporate news this week was dominated by Facebook, after a whistleblower at UK-based Cambridge Analytica told media outlets that the firm surreptitiously took vast amounts of data from 50M Facebook users to apply to their controversial consulting practice. In response to the reports, legislators on both sides of the Atlantic called for answers from the social media giant's top brass, and the stock fell 13% on the week. In other news, Uber halted its autonomous vehicle testing after a woman was struck and killed in Tempe, Arizona, by one of its supervised test cars. Citigroup announced it would restrict gun sales for some of its credit card and business partners, prohibiting the sale of firearms to customers who have not passed a background check or who are younger than 21. Nike shares bounced higher after reporting earnings, pointing to a significant trend reversal to the positive side in North America. And despite picking a difficult week in the markets for an IPO, Dropbox soared in its Nasdaq debut, ending nearly 35% above its opening level in Friday's session.
SUNDAY 3/18
(CN) China: Confirms current PBoC Dep Gov Yi Gang nominated as PBoC Gov
(CN) China Housing Min: Property market remains stable overall, overly fast property price trend 'curbed'; to stick to property control measures
MONDAY 3/19
FB Cambridge Analytica (ties to Trump campaign) said to have tapped the profiles of more than 50M users without their permission - financial press
(EU) EU chief Brexit negotiator Barnier: Confirms agreement on Brexit transition terms; to present joint legal text
UBER.IPO Halts autonomous vehicle testing in all cities following a fatality in Tempe, AZ - press
ORCL Reports Q3 $0.83 v $0.72e, Rev $9.78B v $9.77Be
(CN) Analysts said to see higher probability for PBoC to raise interest rates (timing uncertain) - China Securities Journal
FB Follow Up: Senate Commerce Committee said to request briefing on user data
TUESDAY 3/20
(UK) FEB CPI M/M: 0.4% V 0.5%E; Y/Y: 2.7% V 2.8%E; CPI CORE Y/Y: 2.4% V 2.5%E
(DE) GERMANY MAR ZEW CURRENT SITUATION: 90.7 V 90.0E; EXPECTATIONS SURVEY: 5.1 V 13.0E
386.HK Reports FY (CNY) Net 6.14B v 5.9B y/y, Rev 92.0B v 77.9B y/y
FDX Reports Q3 $3.79 v $3.09e, Rev $16.5B v $16.2Be; Raises Adj FY18 $15.00-15.40 v $13.51e (prior $12.70-13.30)
WEDNESDAY 3/21
700.HK Reports Q4 (CNY) Net 20.8B v 16.6Be, Op 25.7B v 13.9B y/y, Rev 66.39B v 68.61Be
(UK) JAN AVERAGE WEEKLY EARNINGS 3M/Y: 2.8% V 2.6%E; WEEKLY EARNINGS (EX BONUS) 3M/Y: 2.6% V 2.6%E
(UK) FEB JOBLESS CLAIMS CHANGE: +9.2K V -1.6K PRIOR; CLAIMANT COUNT RATE: 2.4% V 2.3% PRIOR
(UK) JAN ILO UNEMPLOYMENT RATE: 4.3% V 4.4%E (match the lowest since 1975)
*(DE) GERMANY SELLS €2.447B VS. €3.0B INDICATED IN 0.5% FEB 2028 BUNDS; AVG YIELD: 0.60% V 0.67% PRIOR; BID-TO-COVER: 1.3X V 1.2X PRIOR
*(US) FOMC RAISES TARGET RATE RANGE 25BPS TO 1.50-1.75% (AS EXPECTED)
GOOGL Reportedly working on blockchain tech, developing a distributed digital ledger to help differentiate its cloud services - press
*(BR) BRAZIL CENTRAL BANK (BCB) CUTS SELIC RATE BY 25BPS TO 6.50%; AS EXPECTED
*(CN) PBOC RAISES RATE ON 7-DAY REVERSE REPO BY 5BPS TO 2.55% FROM 2.50% (tracks Wed's 25bps rate hike by US Fed, as speculated)
THURSDAY 3/22
941.HK Reports FY17 (CNY) Net 114.3B v 113.8Be, EBITDA 270.4B v 269.5Be, Op Rev 740.5B v 745.4Be
*(FR) FRANCE MAR BUSINESS CONFIDENCE: 109 V 109E; MANUFACTURING CONFIDENCE: 111 V 111E
(FR) FRANCE MAR PRELIMINARY MANUFACTURING PMI: 53.6 V 55.5E (18th month of expansion and lowest since Mar 2017)
(DE) GERMANY MAR PRELIMINARY MANUFACTURING PMI: 58.4 V 59.8E (39th month of expansion and lowest since July)
*(EU) EURO ZONE MAR PRELIMINARY MANUFACTURING PMI: 56.6 V 58.1E (56th month of expansion)
(DE) GERMANY MAR IFO BUSINESS CLIMATE: 114.7 V 114.6E; CURRENT ASSESSMENT: 125.9 V 125.6E
*(UK) FEB RETAIL SALES (EX AUTO FUEL) M/M: 0.6% V 0.4%E; Y/Y: 1.1% V 1.2%E
(UK) BANK OF ENGLAND BANK (BOE) LEAVES INTEREST RATES UNCHANGED AT 0.50%; AS EXPECTED
(UK) BOE MAR MINUTES: VOTED 7-2 TO LEAVE INTEREST RATES UNCHANGED AT 0.50% (McCafferty, Saunders dissent calling for 25bps hike)
(US) INITIAL JOBLESS CLAIMS: 229K V 225KE; CONTINUING CLAIMS: 1.83M V 1.870ME ((lowest since Dec 1973)
*(US) MAR PRELIMINARY MARKIT MANUFACTURING PMI: 55.7 V 55.5E (3-year high)
Citigroup said to be restricting gun sales by some of its business partners - NYT
(US) John Dowd resigns as Trump's lead attorney as part of Mueller probe - NYT
*(US) President Trump announces $50B in tariffs over China intellectual property trade violations (as expected) - press
(CN) US bullying poses a threat to the global trade system; US punitive actions are all based on outdated trade laws - China state press
MU Reports Q2 $2.82 v $2.76e, Rev $7.35B v $7.23Be
NKE Reports Q3 $0.68 adj** v $0.52e, Rev $8.98B v $8.84Be; Now see a significant reversal of trend in NA as momentum accelerates
(US) Trump Administration National Security Adviser McMaster to resign; to be replaced by Bush Admin official John Bolton
(CN) China Commerce Ministry (MOFCOM): Plans reciprocal tariffs on US steel and aluminum products; plans tariffs on $3B in US steel, aluminum, pork and wine imports; To take legal action at WTO
WYNN To sell 5.3M shares newly issued shares to Galaxy Entertainment at $175/share (~5.1% of shares outstanding); Confirmed Wynn Family sold 4.1M shares at $180/share in open market, family additionally agreed to sell ~8M shares in private deals (total offering by Wynn Family ~11.7% of shares outstanding, Represents Steve Wynn’s remaining stake)
005930.KR Notes OLED demand slowed in H1 2018, seeking new source of OLED demand
FRIDAY 3/23
KR One report indicates Target and Kroger in potential merger talks; CNBC sources say news is 'bogus'
(US) FEB PRELIMINARY DURABLE GOODS ORDERS: 3.1% V 1.6%E; DURABLES EX-TRANSPORTATION: 1.2% V 0.5%E
(US) FEB NEW HOME SALES: 618K V 620KE
Closing Market Summary: Piling on the LossesStocks dropped again on Friday, piling on losses for the week; the S&P 500 tumbled 2.1% to 2588.26, the Nasdaq Composite declined 2.4% to 6992.67, and the Dow Jones Industrial Average slid 1.8% to 23533.20 -- its worst close since November 2017. The three major indices finished the week with losses between 5.7% and 6.5%.
Tariff talk carried over into Friday's session after China urged the U.S. to "pull back from the brink" following President Trump's Thursday decision to implement tariffs of up to $60 billion on Chinese imports -- which he says are a response to China's alleged intellectual property theft against U.S. tech companies. Beijing threatened to retaliate with tariffs on 128 U.S. products -- including wine, pork, fresh fruit, ethanol, and steel -- but investors took solace in the fact that those products represent a mere $3 billion of total value -- barely a drop in the bucket.
While fear of a trade war likely played a role in Friday's sell off, several other factors also persuaded buyers to stay on the sidelines, including the understanding that the Fed is operating with a tightening bias, the underperformance of the top-weighted technology and financials sectors, and the continued lack of technical support -- the S&P 500 has been beneath its 50-day simple moving average (2742) since Monday. It's worth noting that the benchmark index finished Friday just a tick above its 200-day simple moving average (2585).
All 11 S&P sectors finished in negative territory, with the financials (-3.0%), technology (-2.7%), and health care (-2.1%) sectors leading the retreat. The energy sector was the top performer, benefiting from a 2.4% increase in WTI crude ($65.87/bbl), but still finished with a loss of 0.6%.
In earnings news, Micron (MU 54.21, -4.71) tumbled 8.0% on Friday despite beating profit estimates for its fiscal second quarter and raising its earnings guidance for Q3, while Dow component Nike (NKE 64.63, +0.21) finished with a gain of 0.3% after reporting better-than-expected earnings and revenues for its fiscal third quarter.
Overseas, equity markets in Asia sold off sharply on Friday, with China's Shanghai Composite and Japan's Nikkei losing 3.4% and 4.5%, respectively. Meanwhile, the major bourses in Europe also finished the week on a broadly lower note, losing between 0.4% and 1.8%. The Euro Stoxx 50 (-1.3%) closed at its lowest level in more than a year.
Reviewing Friday's economic data, which was limited to the February readings for Durable Goods Orders and New Home Sales:
- February durable goods orders climbed 3.1%, which is more than the 1.5% increase expected by the consensus. The prior month's reading was revised to -3.5% (from -3.7%). Excluding transportation, durable orders increased 1.2% (consensus +0.6%) to follow the prior month's revised decrease of 0.2% (from -0.3%).
- The key takeaway from the report is that it showed a welcome rebound in business spending that has mitigated some of the nervousness about the loss of economic momentum seen in the data of late.
- New Home Sales in February hit an annualized rate of 618,000, which is below the consensus of 620,000. The January reading was revised to 622,000 (from 593,000).
- The key takeaway from the report is that new home sales declined for the third consecutive month, but are up 0.5% year-over-year.
Investors will not receive any economic data on Monday.
- Nasdaq Composite: +1.3% YTD
- S&P 500: -3.2% YTD
- Dow Jones Industrial Average: -4.8% YTD
- Russell 2000: -1.7% YTD
The interest rate dog that didn’t bark
With fiscal stimulus on the way, why does the Fed stay the course?
When the Federal Reserve lifted interest rates by a quarter point on Wednesday, its first policy decision on new chair Jay Powell’s watch surprised nobody. Everyone had expected the rise, and everyone had largely expected Powell to stay the course the Fed’s monetary policymakers had carefully staked out.
Much like Sherlock Holmes’s dog that didn’t bark, it is the lack of change that should be seen as surprising. Since the Fed’s December meeting, the US government has enacted not just one, but two highly stimulative acts of fiscal legislation. The December tax reform created a fiscal stimulus worth 0.7 per cent of gross domestic product in both 2018 and 2019, calculated as the additional increase in the (non-interest-related) deficit caused by the legislation, according to the Congressional Budget Office. On top comes the new spending authorisation passed in February.
This is a big and sudden fiscal stimulus. It was far from clear in December what form it would take or how stimulative it would be. The fact that Fed policy has hardly changed is therefore a puzzle in need of an explanation. As the chart below shows, the median projection of Fed policymakers for the policy rate in 2018 did not change at all; those for the end of 2019 and 2020 nudged up a notch. That’s long after the fiscal stimulus hits the economy — “ahead of the curve” this is not.
And it’s not as if the Fed doesn’t think the economy will respond. Its projections of growth and unemployment have both improved markedly. Meanwhile, as John Authers highlights, the Fed’s inflation prediction also remains unchanged, “despite more bullish predictions for both employment and economic growth”.
How to explain that a monetary policy deemed appropriate four months ago is still seen as such after these big changes? One answer could be that the Fed thinks its marginally tighter policy path is enough to counterbalance the fiscal stimulus (even if the median projection didn’t change much, many individual interest rate-setters tightened their forecast). But Powell himself went out of his way in his testimony to make people focus only on the March decision, not on the future path. And according to the Fed’s own projections for the real economy, its policy will not in fact undo the expansionary effects added since December.
It could instead be that the Fed thinks the fiscal changes will improve the economy’s capacity to grow by as much as actual growth — thus removing the need for compensatory tightening at the hands of the central bank. Powell made nods to the incentives for investment and greater labour participation due to lower tax rates. But they were no more than nods, and in any case this speculation is too uncertain to base monetary policy on.
A better-founded view is that the US economy is still well below its full-employment capacity — as suggested by the prime-age employment rate, which is still below its 2000 peak, if not by the ultra-low unemployment rate. If so, there is no need for the Fed to tighten just because fiscal policy adds a strong boost to demand; it is welcome that fiscal policy accelerates the economy’s catch-up with its potential. But the inconvenient truth implied by that is that before the fiscal stimulus was enacted, the Fed’s policy was significantly too tight.
In the immediate term, meanwhile, the economy has actually come to seem less rather than more buoyant. The Fed’s own statement made one significant change to its assessment of the economy — labelling household spending and investment growth rates “moderate” rather than “solid”, as it did in January. And the Atlanta Fed’s real-time tracker of economic data suggests GDP has slowed to a crawl, with an estimated contemporaneous annualised growth rate of 1.8 per cent, down from a (admittedly completely unsustainable) 5.4 spike at the start of February.
That suggests other forces may be chilling aggregate demand just as government spending and tax cuts are about to stimulate it. If so, holding fire is an even more appropriate monetary response. Much of the market reaction suggests that investors expect the central bank to have to pull back even further. Futures markets pricing implies less tightening than pencilled in by the Fed, and the dollar dropped after the Wednesday statement.
The Fed has been wrong on monetary policy twice before since the crisis. It consistently over-predicted its own ability to start a tightening cycle, while markets rightly thought rates would stay lower for longer. And, as I have argued here, if the current policy stance is correct, then it was far too tight until very recently. We should not rule out a third mistake: that capacity is greater and demand will be weaker than the Fed now foresees. If so, even the present course may prove uncomfortably tight.
Gapping down
In reaction to disappointing earnings/guidance:
- HTGM -5%, MU -2.8%
M&A news:
- SLCA -1.3% (to acquire EP Minerals for $750 mln in cash)
Other news:
- PGNX -18.1% (FDA extends review of the New Drug Application for AZEDRA by three months to July 30, 2018)
- AKBA -10.4% (proposes $85 mln public offering of common stock)
- FLL -9.9% (registers direct offering of up to 4,166,667 shares of common stock for gross proceeds of up to $12.5 mln)
- LPTX -9% (commences an underwritten public offering of its common stock)
- OMEX -7.8% (after 100%+ move higher)
- RESN -6.9% (prices offering of 5,714,286 shares of its common stock at $3.50 per share)
- PLUG -2.6% (announces pricing of offering of $100 mln of convertible senior notes)
- SRNE -2% (files for approx 34.2 mln share common stock offering by selling shareholders; files for 1,381,345 share offering by holders pursuant to Scilex Pharmace Stock Purchase Agreement)
- AMAT -1.3% (following MU earnings)
- INTC -1.0% (following MU earnings)
Analyst comments:
- PLCE -3% (downgraded to Underperform from Buy at BofA/Merrill)
- NTNX -1.9% (removed from Conviction Buy List at Goldman)
- BPL -1.0% (downgraded to Equal-Weight from Overweight at Morgan Stanley)
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Gapping up
In reaction to strong earnings/guidance:
- SGH +10.8%, HOME +8.1%, NKE +4.3%, (also has acquired consumer data analytics firm Zodiac), KBH +3.8%, CTAS +1.7%
M&A news:
- GSK +5.8% (GlaxoSmithKline plc (GSK) withdraws from process relating to Pfizer's Consumer Healthcare business)
Other news:
- PACB +10.3% (prevails in patent eligibility ruling against Oxford Nanopore; trial is scheduled to occur in early 2020)
- VTVT +4% (completes Phase 1b of Simplici-T1, an adaptive Phase 1b/2 study assessing the pharmacokinetics, pharmacodynamics, safety and tolerability of TTP399 in type 1 diabetes)
- WYNN +3.5% (announces issuance and sale of 5.3 mln shares of common stock; Stephen Wynn's sale of 8.0 mln shares of common stock)
- LFIN +0.8% (after closing at highs -- up 11% on the day)
Analyst comments:
- CCL +1.4% (upgraded to Overweight from Equal Weight at Barclays)
- DXCM +1.0% (upgraded to Outperform from Neutral at Robert W. Baird)
- DM +1.0% (downgraded to Equal-Weight from Overweight at Morgan Stanley)
- GIS +1.0% (upgraded to Positive from Neutral at Susquehanna)
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Early premarket gappersGapping up:
- TOPS +53.1%, PACB +10.3%, SGH +8.2%, HOME +8.1%, GSK +5.4%, NKE +4.8%, VTVT +4%, CXW +4%, WYNN +1.4%, CTAS +1.2%, LFIN +0.8%, KBH +0.5%
Gapping down:
- PGNX -17.5%, FLL -9.9%, OMEX -9.6%, LPTX -9%, MU -6.9%, AKBA -6.7%, HTGM -5%, RESN -4.8%, AMAT -2.1%, SRNE -2%, CENX -1.3%, SLCA -1.3%, INTC -1%, FB -0.8%
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