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Weekly Market Recap | Market Selloff, Strong Dollar, ECB Bailout & Ebola in the USA
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strength and Europe’s deflationary headache got even stronger this week.
outlined his asset purchase plan but left investors with the impression that
the program would be too little to beat
deflation. Draghi said the ECB’s balance sheet would grow back toward €3
trillion compared to near €2 trillion today, suggesting that the potential
universe of covered bond and ABS purchases is up to €1 trillion.
non-farm payrolls were +248K complemented by a combined 69K in upward
revisions to July and August data. The unemployment rate declined from 6.1%
in August to 5.9%, the lowest level since July 2008. The only sour notes
were that wage growth was still pretty weak and
labor force participation slipped lower.
protest movement took over downtown Hong Kong, driving big sequential
declines on the Hang Seng early in the week. The bourse closed for two days of
holidays, fell 2% in early trading on Friday and then closed higher. There are real fears that Beijing will not tolerate much
more unrest in the city.
the S&P500 lost 0.8% and the Nasdaq fell 0.8%.
On
Thursday, European stocks suffered their steepest one-day decline in more than
a year after the ECB delivered mixed messages on its plans for asset purchases.
the ABS and covered bond purchase program could rise to as much as one trillion
euros over two years, but failed to detail how much it might start with.
bank would make provisions in the ABS program to include some bonds from Cyprus
and Greece that are below investment grade and monitor the impact of the ABS
and TLTRO programs on inflation expectations in the “coming months, not
coming years”.
possibility of sovereign bonds purchases – the ECB’s big, controversial policy
bazooka – are off the table for quite some time. After the policy decision,
reports indicated significant opposition to the ABS program (much less full
blown QE). Hans Werner Sinn, head of Germany’s hawkish IFO Institute, said
asset purchase program was outside the ECB’s mandate and called on the German
government to counter the move.
governors oppose parts or the entire ABS program: Germany’s Schaeuble is long
on the record opposing any form of ECB asset purchases, Austria’s Nowotny is
said to also oppose the program, while France’s Noyer opposes the use of
external brokers to buy securities.
in Italy plummeted 3.9%, Spain declined 3.1%, France dropped 2.8%, Germany fell
2.0%, and the Euro Stoxx dropped 2.4%.
In an echo of protest movement seen over recent years in Egypt, Ukraine, Iran
and elsewhere, students and citizens in Hong Kong occupied public space last
weekend and began agitating for free elections after Beijing demanded that it
be able to vet candidates for local office. The protests drew a heavy-handed
initial response from the police, who pepper sprayed crowds on Sunday.
downtown and demanded that Hong Kong Chief Leung Chun-ying resign by Thursday.
Leung refused, although he permitted negotiations between the students and the
police. Beijing has been largely silent on the protests, however there were
vague reports of troop movements near the city and a thinly sourced report that
it had given Hong Kong leaders notice to resolve the problem quickly or have
the Chinese military do it for them. There was another round of violence
between the students and locals opposed to the protests (or paid thugs,
alternatively) on Friday, but as of writing neither side seemed to have the
upper hand.
Front-month WTI crude has moved lower all summer, declining from the
ISIS/Ukraine highs above $104/barrel in June to just shy of 2014 lows around
$88 on Thursday. The rise of the dollar is the prime candidate behind crude
weakness; however other news out this week also contributed to the move below
$90.
lowered crude prices for November delivery by $1/barrel, and also cut prices
for certain natural gas deliveries. This followed reports earlier in September
that Saudi Arabia trimmed production levels in the past month. There has
been talk among analysts that OPEC members are gearing up for a price war.
extraordinary meeting to discuss the situation, and its next meeting is
scheduled for November 27th. Brent crude slid to $92/barrel, more than 20% below
its June peak.
Ebola arrived in the United States this week.
The CDC confirmed the first case of Ebola was diagnosed Texas, where a traveler
from Liberia has been hospitalized after spending time in his home country
aiding Ebola victims. On Friday, Texas health officials said they were
monitoring 50 people that the man had come in contact with and that 10 of them
might be at high risk for contracting Ebola. Airline,
cruise ship and hotel shares have been under pressure this week on the news.
Chrysler and GM reported September vehicle sales up 18.8% y/y and 19.4% y/y,
respectively. Meanwhile Ford said its sales fell 2.7% y/y due to lower fleet
sales and a planned pull-back on sales of its 2014 F-150 pickup as it prepares
to introduce the 2015 all-aluminum F-150. The industry’s SAAR annualized sales
rate cooled off to 16.43 million from the torrid 17.53 million pace in August.
Salix Pharmaceuticals called off a merger deal with Italy’s Cosmo
Pharmaceuticals that was structured as a tax inversion. This comes just a week
after the US Treasury took a series of steps to curb such deals and prevent
companies from avoiding taxes. Since the Treasury announcement, the company
faced pressure from top shareholders to cancel the deal and sell itself,
possibly to Allergan or Actavis. Tibco Software agreed to sell itself to Vista
Equity Partners for $4.3 billion, or $24/share. The sale comes after a
difficult year for Tibco, which has faced declining profits and pressure from
an activist investor to sell.
The rise of the dollar continued unabated this
week, to the detriment of nearly every other global currency.
Between disappointment with Draghi’s ABS plan and the very strong September US
jobs report, nothing appears able to stop the greenback, and many analysts have
started discussing a secular reversal in the 30-year downtrend in the dollar.
EUR/USD tried to retake its 200-day moving average on Monday around 1.2710, and
then broke to 1.2570 after the advance September Eurozone CPI reading slid to
0.3% v 0.3%e and the core reading came in lower than expected, 0.7% v 0.9%e.
USD/JPY rose to 110.10 as of Tuesday, prompting a pullback to 108 later in the
week. The pair retested 109.90 on Friday in the wake of the September US jobs
report.
China mainland markets were on holiday for much of the week, however the Stats
Bureau still put out the official PMI figures for September. The manufacturing
sector reading remained just above the threshold of expansion at 51.1, a
decimal better than consensus and unchanged from the prior month. New orders
and Employment components marked notable declines, prompting government
economists to assess the overall business sentiment as weak. Non-manufacturing
PMI was also somewhat of a disappointment, falling to an 8-month low of 54.0
from 54.4 on marked deceleration in Services, Input Prices, and Inventories
components. The Shanghai Composite returns for trading on Wednesday as Beijing
prepares for the start of the party Plenum on October 20th that will hopefully
yield a verdict on the future of PBoC Gov Zhou.
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