Saturday, March 8, 2014

Trade the News Weekly Market Update: Cold Weather, Cold War

Hope everyone had a profitable week of trading! 
- Joseph James & Team

- The S&P 500 notched new all-time closing highs this week and not even the prospects of war in Ukraine managed to unseat the relentless bid. Ukraine became a central issue after Russian troops occupied Crimea without a shot fired and the Ukrainian province prepared to legitimize the move via referendum. 

In Europe, ECB President Draghi was more hawkish than expected and resisted calls to offer additional accommodation or even say the word deflation. At China's National People's Congress, Beijing unveiled its official 2014 targets, most notably maintaining the 7.5% GDP objective for the third year in a row and set the inflation target at 3.5%. 




Meanwhile, China's Feb manufacturing PMI fell to an eight-month low of 50.2, just a hair away from contraction. For the week, the DJIA rose 0.8%, the S&P500 gained 1.0% and the Nasdaq added 0.7%.

- On Monday, Russia's MICEX index fell 11%, the DAX was down as much as 3% and the CAC fell as much as 2.5% as Europe responded to Russian escalation over the weekend. The ruble was in free fall, prompting the Russian central bank to raise its key lending rate to 7% from 5.5%. At its worst, USD/RUB rose as high as 36.6, the ruble's weakest level since the 1998 currency crisis. 


An air of unreality surrounded Russian statements about the situation, as Putin denied that Russian troops were even participating in the occupation of Crimea (he said the troops were just extraordinarily well-armed local Russians). The Crimean parliament asked Putin to start the procedure of formally allowing Crimea to join the Russian Federation and scheduled a referendum for March 16th. Ukraine called the moves illegal and promised to hold on to the peninsula. Europe responded by threatening to consider sanctions, while the US is actively establishing a limited sanctions regime and sending token military assets to the region.

- The February jobs report took markets by surprise on Friday. After the ADP miss (at +139K jobs v +155Ke) and various weak employment components from February regional Fed reports, many participants were assuming the Labor Department report would be terrible. On Thursday, Fed Governor Lockhart said he did not expect to see an outstanding jobs report. But in the event, the Feb NFPs roundly beat expectations (+175K v +149Ke) and the unemployment rate ticked up one-tenth to 6.7%. The biggest surprise in the data was a 0.4% increase in average hourly earnings, the largest increase since last June, while average hours worked fell, likely due to distortions caused by weather.

- The February ISM manufacturing data was slightly better than expected, rising to 53.2 from January's nine-month low of 51.3. The key new orders component saw solid gains, rising to 54.5 from 51.2 prior. Note that the weakness in December and January was chiefly seen in the new orders component.

- February auto sales numbers are the latest economic data to be impacted by winter weather. Ford and GM both saw sales decline on a y/y basis, although total unit sales were more or less in line with expectations. Sales executives from both firms cited the weather as restraining sales. Chrysler's sales grew 11%, and executives said the weather only helped sales of their Jeep line, which were up 47% y/y. Nissan's sales grew 16% y/y, although this was a bit shy of expectations.

- In earnings news, shares of Radio Shack are down 20% this week after the troubled retailer reported brutally bad fourth quarter results, with losses three times the year ago figure and retail comps down 12%. Homebuilder Hovnanian dragged down the entire sector after it missed revenue expectations and racked up an unexpectedly large quarterly loss. The firm's contract cancellation rate crept up and its net contracts signed metric fell y/y. HOV is down 17% while fellow luxury home builder KBH is down nearly 10% this week. Costco missed top- and bottom-line expectations in its second-quarter report. The price club's same store sales held up well, up 2% overall while US comps were up 4%. Earnings fell y/y, dragged down by weak margins in the holiday season and tough FX conditions.

- Safeway announced a formal merger deal with Cerberus's Albertsons after a long courtship. The $40/share price values Safeway at more than $9 billion. Note that there have been reports that Kroger is still mulling a higher offer. A Deutsche Bank analyst wrote that Kroger should bid and that Safeway could fetch a price above $40.

- The ECB resisted calls to fight disinflation with more easing at its policy meeting on Thursday. EUR/USD was steady after the ECB left rates on hold and refrained from launching any new programs, and then moved sharply higher, testing 1.3850, once it was clear that ECB President Draghi would merely reiterates familiar positions at the post-rate decision press conference. Draghi said that recent improvements in the eurozone obviate the need to halt SMP sterilization. On Friday morning, EUR/USD moved even higher, probing briefly above 1.3920 to its highest level since late 2011. The euro weakened after the US jobs report.

- China has now witnessed its first corporate default in history. Shanghai Chaori Solar Energy is looking to sell overseas assets to make up a missed bond payment and neither banks nor government entities are stepping in to help. Chaori's default took place during the annual People's Congress session, reinforcing the signal that Beijing is letting market forces play a stronger role in the economy. However analysts point out this is only the beginning given that the number of Chinese companies with debt levels double equity has surged since the financial crisis began.

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