Weekly Market Update: Greek and Ukraine Hopes Reignite Risk Appetite
US equity indices roared higher this week, buoyed by decent corporate earnings and abetted by the absence of significant bad news. US rates rose as improving risk appetite pushed the 10-year US Treasury yield back above 2% for the first time in nearly a month. In Europe, the Russians and the Ukrainians signed another ceasefire agreement in Minsk, which in outline provides a route to decelerate the conflict in eastern Ukraine but still faces a rough period of implementation. Negotiations continued all week between the EU and Greece, appearing to approach some sort of agreement a couple of times but without concluding a final deal. The five-year lows in Chinese CPI inflation data further strengthened expectations for more PBoC intervention in the New Year in China. The S&P500 climbed to new all-time highs on Friday, up 2% on the week, while the DJIA rose 1.1% and the Nasdaq surged 3.2%.
The two US data highlights of the week were the JOLTs jobs report and the retail sales data. The December JOLTS job openings report - Fed Chair Yellen's favorite gauge of employment demand - topped expectations and climbed 181K from November to a total of 5.03M, its highest level since 2001. The US January retail sales report was not encouraging: the 0.8% decline followed the 0.9% slide in December (which was the biggest drop in a year). Slowing automobile sales was part of the story, as was less expensive gasoline. However, ex automobiles and fuel sales gained a mere 0.2%, less than expected.
Fed officials were out in force prepping the market for inevitable rate hikes. The hawks pressed hard for tightening. Richmond Fed President Lacker said June looks right for the first rate hike, and that data showed liftoff should occur even earlier. The Dallas Fed's Fisher said he lobbied for rate lift off in March, but "lost that argument." The Philadelphia Fed's Plosser took issue with the 'patient' language introduced in the December statement, warning that the new verbiage could tie the FOMC's hands. One of the key thresholds for policy is judging when the economy has reached full employment, or the 'natural' rate of unemployment. Fed Governor Powell asserted that the natural rate of unemployment may have dropped to 5% or lower, echoing recent comments by more moderate officials Rosengren and Kocherlakota, while the current 5.7% level of unemployment underestimates the amount of slack in the economy.
German Chancellor Merkel and French President Hollande made an unheralded trip to Moscow in a last ditch effort to restore the ceasefire agreement in Ukraine. They convinced Russian President Putin to sign on to a new agreement that echoes the failed Minsk ceasefire signed last September, calling for Russian forces to return control over the Ukraine/Russia border to Kiev, and requiring both sides to pull back heavy weapons and exchange captives. The agreement is effective at midnight Kiev time on Saturday, but it remains to be seen if the ceasefire will hold and open a path toward resolving the year-old Ukraine crisis.
There was an excess of sound and fury over the Greece situation this week, with European and Greek negotiators at the Eurogroup and the leaders' summit reiterating their incompatible positions. Athens reportedly rejected a 3-6 month extension of the current bailout and EU officials rejected Greece's request for a new deal. Despite the rhetoric both sides are continuing technical discussions through the weekend and most observers expect a deal will be ultimately be reached that allows Greece to stay in the Euro Zone. Meanwhile Greece bank deposit outflows kept increasing, forcing the ECB to lend another €5B to the Greek Central Bank under the ELA to keep the nation's financial system liquid.
Analysts were waiting for the Danish central bank to cut interest rates again or possibly drop the euro peg at this week's scheduled meeting, but events elsewhere in Scandinavia overtook them. Sweden's Riksbank unexpectedly cut its key interest rate from 0% to a record low of -0.1% and also launched its own QE program. The Riksbank pledged to buy $1.2 billion in government bonds, warning there was a risk inflation would stagnate. Sweden's annual inflation rate in January stood at -0.3%.
Brent rose back above $60 this week and WTI spent most of the week above $50 as crude prices cautiously moved higher. Some analysts assert that crude prices have bottomed for good, but others aren't so sure. Goldman Sachs's chief commodities researcher told CNBC that oil could test $40/bbl in the next 6 months, possibly dipping down toward $35/bbl. The CEO of independent oil trader Vitol warned that crude prices could resume a downward trajectory as US stockpiles keep growing despite the significant idling of drilling capacity.
On Tuesday, shares of Apple closed at just over $122 each, making the firm the first publicly-quoted US firm to achieve a market capitalization of more than $700 billion. Apple CEO Cook made remarks at a tech conference, noting that his company would buy about $850 million of power from a new First Solar plant, guaranteeing that all of its California facilities ran completely on solar power.
In earnings, Pepsico beat expectations, hiked its dividend and added a big chunk to its stock buyback. Time Warner turned in a solid quarterly report but warned investors on the conference call that subscription revenue growth would slow this year. Shares of Tesla tanked after the firm disappointed with a quarterly loss and disclosed various difficulties with production, new models and the strong dollar. Cisco soared on signs the turnaround is starting to take hold, with earnings strong, guidance good and emerging markets inching back to growth. Like other many other consumer product names, Kellogg said FX and weak sales hurt the bottom line.
Expedia reached a deal to buy Orbitz Worldwide for about $1.3 billion in cash, at $12/share, a 24% premium to the prior close. With the transaction, Expedia will gain not only Orbitz and its business-focused travel sites, but also CheapTickets and HotelClub. Note the deal comes just two weeks after Expedia snapped up Travelocity for $280 million.
China's January CPI dropped to 0.8% from 1.5% in December, while PPI dropped to -4.3% from -3.3% prior. Officials said the big decline in CPI was mostly due to lower food prices. PPI has marked its 35th straight month in the red. Economists said the PBoC is now likely to lower deposit rates and deliver another RRR cut sometime in the first half of the year. The PBoC's open market operations injected a net total of 205 billion yuan this week, its fourth consecutive week of liquidity injections and its biggest infusion in more than a year. The January trade data was likewise worrisome, featuring the biggest y/y decline in imports in more than five years and a marginal drop in exports. On Friday, January new yuan loans rose to a five-year high going into next week's Lunar New Year, in part making up for soft demand for credit in December, even as M2 money supply hit multi-year lows of 10.8%.
In Japan, Finance Minister Aso attempted to defuse press speculation that, even under the optimal economic scenario, the government will be unable to achieve primary fiscal balance by FY20 despite the benefits of lower oil prices and weaker yen. Aso acknowledged the "extremely severe" state of Japan finances in promising not to waiver in implementing the next consumption tax hike in 2017. In the meantime, investor demand for JGBs remains lukewarm, with the yield on the benchmark rising to a 2-month high above 0.4% after another underwhelming auction on Friday. Looking ahead, market focus will turn to Japan Q4 GDP on Sunday evening, expected to return to expansion after two quarters of decline.
