Weekly Market Update: Focus on Fundamentals
The S&P500 pushed out to four-month highs intraday on Wednesday, putting them within points of all-time highs. Crude prices did not plummet after the OPEC/non-OPEC production freeze talks disappointed in Doha, helping to hold up broader indices. Interest rates in Europe and the US have quietly backed up to their highest levels in almost a month suggesting money is finding its way out of sovereign bond markets and buoying equity valuations as well. Friday saw a soft April US Markit PMI manufacturing reading weigh on sentiment, and along with renewed skittishness about global central bank policies and a round of particularly weak US earnings reports took things lower. For the week, the DJIA gained 0.6%, the S&P500 added 0.5%, while the Nasdaq fell 0.6%.
Boston Fed President Rosengren offered a fairly hawkish outlook for US policy, stating that the Fed funds rate may rise faster than markets currently expect. He noted that the March jobs data portends a higher GDP rate, with growth running slightly over potential. He also said that jobless rate would drift down and that the core inflation rate is much closer to the 2% target, noting there is a cost if US monetary policy is not aggressive enough.
The Shanghai Composite saw a steep midweek swoon on as Xinhua speculated that the PBoC could shift to a more prudent monetary policy stance this year, presumably backtracking from a "slight easing bias" that recently lifted expectations of more policy easing. On Wednesday, the Shanghai Composite dropped to a three-week low on the reports, as well as a speech by PBoC Chief Economist Ma Jun, who called on the government to restrain lending and prevent company leverage ratios from overheating.
Politics got in the way of economics at the OPEC/non-OPEC oil producers meeting last weekend in Doha. Tensions between Saudi Arabia and Iran derailed the talks and the confab failed to produce an oil output freeze. Crude prices dropped 5% ahead of the open of trade on Monday, however the losses were very short lived, and both Brent and WTI pushed out to fresh YTD highs midweek and closed out the week higher than they were ahead of Doha. WTI hit highs of $44.50 and closed the week just shy of $44, while Brent peaked above $46 and exited Friday around $45. A three-day oil worker strike in Kuwait shut that nation's output briefly, providing some support midweek, and reports circulated that there could be an emergency OPEC meeting in May, ahead of the scheduled June OPEC gathering. Another factor lending support: China's crude imports in March were the second-highest on record, up 21.6% y/y to around 7.7 million bpd, due in part to strong demand from government stockpiling.
The yen has moved strongly off the 21-month highs against the dollar seen in the first half of April as officials in Tokyo worked hard to talk down the currency. USD/JPY came into the week around 108, and by Friday the pair had pushed above 111, with a big part of that move following reports BoJ officials are considering lending to banks at negative rates. These reports stoked speculation that the bank will implement more easing measures when it meets next week and updates its projections for growth and inflation. Economic data out of Japan released this week would certainly justify a more proactive approach, as preliminary manufacturing PMI for April plunged to a three-year low, and the output, new orders, export orders, and input prices all decreased at a faster rate, implying lower global demand and persistent deflationary pressures. In addition, deadly earthquakes rocked Japan over the weekend, and initial damage estimates suggest there could be a non-trivial impact on annual GDP. The impact was enough to raise suggestions the events could justify a delay or reduction in the sales tax hike planned for next spring.
The campaign to keep the UK in the European Union saw a boost in support, according to polls out this week. The latest ORB poll for the Daily Telegraph reflected the overall trend this week, with the stay camp taking 52% of the vote and the leave camp with only 43%, a decrease of five points since the previous ORB poll in early April. Cable tested three-week highs as several better poll results for the stay vote were published this week, with GBP/USD popping above 1.4400 a few times over the course of the week. Various officials made dire warnings about the implications of Brexit. At the House of Lords on Tuesday, BoE Governor Carney defended his recent warnings about the costs of Brexit, saying he has a duty to comment on risks. IMF Chief Lagarde said Brexit posed a major downside risk to the European economy. Even Scottish National Party leader Salmond waded in, warning that Scotland would hold another independence vote if the UK voted to leave the EU.
There were no big surprises at Thursday's ECB decision, with rates on hold and little new from the post-decision press conference. President Draghi said the ECB can deploy more stimulus if global troubles threaten to push a modest economic recovery off the rails and further weighs on inflation. Draghi defended ECB policies from recent German criticism and noted that the ECB is tasked with setting policy for all the countries in the euro zone, not just Germany.
The preliminary US Markit manufacturing PMI index fell to its lowest level in six years, to 50.8 from 51.5 in March. Softer rates of output and new business growth along with a weaker gain in employment were the main factors weighing on the index. The big miss undermines the theme that while the first few months of the year were weak for the US manufacturing sector, spring would see stronger results.
There was mixed data out of the US housing sector. March housing starts fell more than expected and permits for future construction hit a one-year low, while March existing home sales saw a nice rebound following February's uncharacteristically large decline. Starts decreased 8.8% to their lowest level since last October, while permits dropped 7.7% the lowest level in a year. Meanwhile, closings came back in force in March as a greater number of buyers - mostly in the Northeast and Midwest - overcame depressed inventory levels and steady price growth.
Brazil President Rousseff did not survive an impeachment vote in the lower house of Parliament. The ruling party has conceded defeat, although Rousseff said she would keep fighting the decision in the courts. The impeachment process now moves to the Senate, where deliberations begin in two weeks. Rousseff will stand trial in the Senate on charges that she violated federal budget laws by using accounting maneuvers to cover up a gaping budget hole.
Earnings from both Goldman Sachs and Morgan Stanley reflected results from the other big banks, with profits beating greatly diminished expectations. Goldman's net income shrank 60% y/y, while most major business lines saw big, double-digit declines, as expected. Regional banks Fifth Third, BBT Corp and Bank of New York both turned in good growth, with profits and revenue rising firmly, and loans and deposits also seeing positive growth.
Caterpillar saw earnings drop nearly 65% y/y and General Electric's earnings were down nearly 30%, with revenue lower y/y at both industrials. Meanwhile, Honeywell saw modest growth in both profits and revenue as the aerospace industry held it together. McDonalds beat expectations, while YUM! saw its Chinese comps finally go positive, marking recovery for the firm's most important business. Coca-Cola and Pepsi saw revenue eroded by FX issues, with Coke's revenue down for the fourth quarter in a row and Pepsi's down for the sixth quarter in a row.
Both Microsoft and Alphabet faced headwinds in the quarter. Alphabet's quarterly profit rose y/y, though not at as fast a pace as analysts had expected. The Google parent saw higher traffic acquisition costs and expenses and lower aggregate cost per click. For Microsoft, the ever-shrinking PC market and FX problems conspired to shrink revenue and impede profits. Intel saw revenue at its PC group contract 14% y/y and only just met expectations in the quarter. The firm also said it would cut 11% of its workforce as demand contracts and it shifts focus to new markets like the Internet of Things.