Weekly Market Update
Notable events over the last week
- Central bank commentary dominated headlines last week with the Fed, PBOC, BOJ and ECB all making announcements. In the US, Wednesday saw the release of the FOMC policy statement following the two day January meeting. The message was relatively dovish and expressed renewed worry about financial market turbulence and slow economic growth abroad. The committee recognised the decline in consumer and business spending over the last quarter however acknowledged further improvements in the labour market, with job gains seen as ‘strong’ rather than ‘ongoing’. Justification for a March move is now looking very difficult with the futures market currently pricing in a 20% chance of a hike, down from 25% probability prior to the release.
- The economic data out from the US was mixed however better than suggested by recent sentiment. Q4 GDP grew by just 0.7% QoQ, after 2% growth in Q3 however softer than expectations of 0.8%. The YoY nominal 2015 figure printed at 2.9%, 0.1% higher than expectations. The reading confirmed that there has been further deterioration in underlying demand, mainly non-residential fixed investment, and little sign of inventory reduction. Consumer spending grew by 2.2%, a big drop from 3% in Q3, as the unusually mild weather hurt sales of winter apparel in December.
- The Bank of Japan surprised markets on Friday by announcing the adoption of negative deposit rates. The benchmark rate has been slashed by 20bps to -0.1% on funds above certain thresholds that are deposited with the central bank. The BOJ Governor, Haruhiko Kuroda, also announced a delay to the bank’s target date for reaching its 2% inflation goal by six months, now aiming for the first half of 2017. The news came on the back of softer than expected data, with December headline CPI falling one-tenth to +0.2% YoY, in line with expectations, however the ex-food and energy reading down to +0.8% YoY (vs. +0.9% expected). Significantly, industrial production fell -1.4% MoM in December (vs. -0.3% expected).
- In Europe, Mario Draghi launched a staunch defence of the European Central Bank’s aggressive monetary easing announced in January, in a bid to counter critics. Draghi noted that there were “real risks to doing nothing to push inflation back toward the ECB’s target of near 2%” and that policymakers would “review and possibly reconsider” their stance at the March meeting in the face of the slide in oil prices and slowdown in emerging markets.
- The oil markets finally had some good news last week which saw Brent rally 3.42% on Friday alone and close the week up 9.5%. In fact, Brent has closed higher on seven of the last nine trading days as rumblings around potential OPEC production cuts added to the positive sentiment generated from a dovish ECB and BOJ. Although the odds of an imminent coordinated production deal are slim, the process between OPEC and Russia appears to be underway in a bid to arrest the market collapse. In addition to the production rhetoric, a number of US shale firms announced larger capital spending cuts for 2016.
Q4 2015 earnings season update
- As of Friday, 40% of the companies in the S&P 500 have reported earnings for Q4 2015 with 72% beating EPS estimates and 50% reporting sales above the mean estimate. In aggregate, companies are reporting earnings that 1.7% above the estimates. The blended Q4 EPS calculated using the actual EPS for the companies that have reported and the consensus estimates for those yet to report is running at -5.8%. At sector level, the Energy and Materials sectors are reporting the largest YoY decreases in earnings, while the Telecom Services sector is reporting the largest YoY increase in earnings.
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