A Weak Week
The Fed tries to jawbone the markets higher but an ugly earnings reporting season starts next week. Oil prices jump as oil spills and the dollar drops.
Financial Review for 04-08-2016 by Sinclair Noe
DOW + 35 = 17,576
SPX + 5 = 2047
NAS + 2 = 4850
10 Y + .03 = 1.72%
OIL + 2.46 = 39.72
GOLD – 1.90 = 1239.40
Fed Chair Janet Yellen says the economy is on “a reasonable path” and the rate hike in December was not a mistake. Yellen said, “We think a gradual path of rate increases will be appropriate” given the progress the economy has made and is likely to continue to make. Yellen said she doesn’t think there is a bubble, even though the market rally is stretching into year 7. And she’s still worried about the rest of the world. She said the U.S. is “suffering from a drag from the global economy.” And that is the main reason the Fed didn’t raise rates in March and almost certainly won’t do it at its next meeting in April
Meanwhile, in a speech this morning, New York Fed President William Dudley, who gets a vote at every Federal Open Market Committee meeting, said the risks to the economy are more to the downside than the upside. “The low levels of energy and commodity prices may signal more persistent disinflationary pressures than I currently anticipate, while renewed tightening of financial market conditions could have a greater negative impact on the U.S. economy. Given my outlook and risk assessment, I judge that a cautious and gradual approach to policy normalization is appropriate.” Dudley said the Fed had to be cautious about lifting rates because of the “limited” ability to reduce them.
Fed jawboning should have been sweet music to Wall Street, and stocks started the session with triple digit gains but it took a rally in the final 30 minutes to hold onto gains for the day. The major averages declined more than 1 percent for the week, the worst since Feb. 5 for S&P 500 and Nasdaq composite and the worst since Feb. 12 for the Dow Jones industrial average. The S&P 500 clung to year-to-date gains in the close after briefly erasing them as the major averages temporarily turned lower in afternoon trade.
Next week kicks off the earnings reporting season as Alcoa reports after the close on Monday. The relevance of Alcoa’s results and outlook is fairly limited; it doesn’t tell us much beyond what may be useful for the broader industrial metals space. Q1 estimates fell sharply over the last three months and are continuing to come down. Total earnings for the quarter are expected to be down -11.1% on -2.3% lower revenues. The negative earnings growth in Q1 will be the fourth quarter in a row of earnings declines for the S&P 500 index. The headwinds remain unchanged from other recent periods, essentially a combination of Energy sector weakness, the dollar strength and global growth constraints. Please note that Q1 earnings growth would still be in the negative even on an ex-Energy basis. The magnitude of negative revisions that Q1 estimates suffered over the last three months has been the highest of all recent quarters in the comparable periods. Fresh weakness in oil prices at the start of the period was no doubt a big driver of pushing estimates down. And there is a good chance things won’t get much better. Total 2016 Q2 earnings are currently expected to be down -5.5% on -2.1% lower revenues, a growth pace that will go down more in the coming days as companies report Q1 results and guide lower for Q2.
Oil prices jumped over 6% today, posting their largest weekly gain since February – up 8% – as drawdowns in U.S. crude stockpiles fed hopes that a punishing global oversupply may be nearing tipping point. Gasoline and diesel prices rallied along with crude, rising more than 5 percent each. Crude stockpiles fell by nearly 5 million barrels last week versus analysts’ forecasts for a build of 3.2 million barrels.
The shutdown of the Keystone crude pipeline that delivers oil to Cushing also contributed to a drop of more than 480,000 barrels at the Oklahoma delivery point for U.S. crude futures. The pipeline leak was discovered on Saturday and forced a key section of the controversial pipeline to be shut down. TransCanada initially told regulators the spill totaled about 187 gallons of oil but on closer examination they now say the leak in South Dakota is up to 16,800 gallons. Oilfield services firm Baker Hughes reports the number of oil rigs operating in US oil fields fell by 8 to a total of 354 in the previous week. At this time last year, drillers had 760 oil rigs online.
Japan’s Finance Minister has described the dollar’s recent fall vs. the yen as “one-sided movements” and vowed to intervene if necessary to continue the country’s fight against deflation. The greenback sank to a 17-month low. The dollar has tumbled nearly 10% against the Japanese currency this year. The dollar lost more than 3 percent for the week against the yen, its worst week since the one ended Feb. 12. The dollar index was slightly lower with the euro near $1.14, and the index ended the week 0.4 lower for its fifth negative week in six.
The World Trade Organization has revised its 2016 global trade forecast downward by more than one percentage point, warning that a slowdown in China and broad market volatility continue to threaten growth. In September, the WTO estimated that global trade would rise by 3.9% this year, but it now sees a figure of 2.8%, the same rate as 2015 and the fifth year in a row it has been below 3%.
Wholesale inventories declined by 0.5% in February, marking the fifth drop in five months and offering more evidence that first-quarter growth will be weak. Wholesale inventories for January were also revised down sharply to show a 0.2% decline instead of a 0.3% increase. Wholesale sales, meanwhile, slid 0.2%. Companies have cut back on production to get inventories in line and avoid an excess buildup. While that’s good in the long run, it also means weaker growth now and suggests companies overestimated how well the economy was performing.
The Panama Papers scandal has claimed its first banking chief executive with the resignation of Michael Grahammer, CEO of Austrian lender Hypo Landesbank Vorarlberg. With new details of offshore accounts surfacing, more high profile and political figures are looking to come clean. U.K. Prime Minister David Cameron has admitted to benefiting from a fund of his late father, but said that it was not set up to avoid taxes, and he himself paid state dues on the shares he sold.
The US government has filed an appeal of a federal judge’s decision to rescind the Financial Stability Oversight Council’s determination that MetLife is a systemically important financial institution. Earlier, Treasury Secretary Jacob Lew blasted the ruling in a statement, saying it would leave MetLife will even less oversight than before the financial crisis.
General Motors has settled a lawsuit that would have been the third bellwether case to go to trial over its faulty ignition switch linked to nearly 400 injuries and multiple deaths. The first case that went to trial earlier this year was dismissed after GM uncovered evidence the plaintiffs committed fraud, while a second trial ended with the jury determining the ignition switch wasn’t to blame for a crash despite the part being defective. GM has now paid more than $2 billion to the Justice Department, shareholders and thousands of consumers.
Saying the deal could adversely affect the country’s national defense, the U.S. military has raised concerns with a federal rail regulator over the voting trust Canadian Pacific proposed as part of its takeover bid for Norfolk Southern.
Yahoo has extended the deadline to bid for its businesses by a week to April 18. Yahoo has launched an auction of its core Internet business, which includes search, mail and news sites, after abandoning its plan to spin-off its stake in Chinese e-commerce giant Alibaba. Verizon Communications is reportedly ready to make a bid for Yahoo’s Web business, and hopes to make a merger more successful by also making an offer for a stake in Yahoo Japan.
Adobe Systems is issuing an emergency update to its widely used Flash software for Internet browsers after researchers discovered a security flaw that was being exploited to deliver ransomware. The company says more than the 1 billion users of Adobe Flash on Windows, Mac, Chrome and Linux computers should update the product as quickly as possible. Ransomware schemes have boomed in recent months, with increasingly sophisticated techniques and tools used in such operations.
SpaceX just made history by landing its Falcon9 rocket back on a barge in the middle of the ocean. The spacecraft delivered supplies to the International Space Station, then the rocket landed on a barge in the Atlantic. They had tried this maneuver 4 times before without success. Building reusable rockets that are able to land back on Earth is critical to keeping future spaceflight costs down.
The US Postal Service announced Thursday that it will drop the price of postage stamps starting this weekend; the first time it has lowered the postage rate in 97 years. The cost of a stamp to mail a standard letter will decrease from 49 cents to 47 cents this Sunday. The price of sending a postcard will also drop by a penny, to 34 cents, while international mail will go down by a nickel, to $1.15 per letter instead of the current $1.20. Bad news if you bought a boatload of “Forever” stamps. However, this might be a good time to sit down with paper and pen and write something, and then drop it in the mail. It tends to have a much greater impact than an email or text, both for the writer and the reader.