Risk On! Financial markets were delivered a package of anti-depressants all at once:
1- U.S. recession risks fading some more:
Initial unemployment insurance claims declined to 259,000 during the week ended March 5 from 277,000 in the prior week, revised from 278,000. It was the lowest level of initial claims since early October. Expectations were for 272,000 applications in the Action Economics Forecast Survey. The four week moving average of claims fell to 267,500, also the lowest point since October. During the last ten years, there has been a 75% correlation between the level of initial claims and the m/m change in payroll employment.
Net Worth of U.S. Households Rises to Record in Fourth Quarter The net worth of U.S. households ended 2015 at the highest level on record, driven by stocks that remained at high levels and a continuing rebuild of home equity.
The net worth of U.S. households and nonprofits, defined as the total of all assets minus all liabilities, reached a record $86.8 trillion in the fourth quarter, according to a report Thursday from the Federal Reserve. Wealth climbed by more than $1.6 trillion from the third quarter.
(…) The value of the real estate climbed to $25 trillion, against $9.5 trillion in mortgages, which works out to home equity of more than $15 trillion. (…)
According to the real-estate data company CoreLogic, about 61 million U.S. homeowners have at least 25% equity in their homes—an increase of 10 million since a year ago. (…)
Today, about 4.4 million homes still have negative equity, according to CoreLogic. By contrast, in 2009, over 12 million homes were underwater. The remaining underwater homes are largely concentrated in areas hit hardest by the financial crisis, such as Nevada, Florida and Arizona, where prices are still lower than the heady days of the housing bubble. (…)
Americans held over $13 trillion in wealth in stocks and an additional $20.9 trillion in pension funds.
(…) In addition to the buffer from home equity, households also have a record $10.7 trillion in deposits, which include checking and savings accounts and certificates of deposit.
(…) The overall level of household liabilities is below where it was in 2008. The figures are not adjusted for inflation, making the still-low debt levels even more striking.
2- Super Mario does it again although it first went down badly:
The ECB cut interest rates, expanded the pace and scope of its bond-buying, and offered banks vast new long-term loan programs on terms so beneficial that some banks may be paid to borrow money. (…)
But many agreed that the sudden turnaround in markets came as Mr. Draghi hinted rates may have hit a floor. The ECB chief said officials had decided not to introduce a tiered system of deposit rates—designed to protect banks from outsize charges on their reserves—because he didn’t anticipate cutting rates further into negative territory.
(…) the experiment with subzero rates, which effectively act as a tax on the banking system, has already stoked concerns this year about the health of lenders in the eurozone. Mr. Draghi acknowledged those concerns Thursday.
“Does it mean we can go as negative as we want without any consequences for the banking sector? The answer is no,” he said during the news conference following the ECB’s announcement. (…)
But this morning, Mario’s medicine started to work:
“At the end of the day, the ECB delivered more than expected and is pumping a lot of money into the system.”(…)
ECB bazooka blasts stocks higher Bund yields and euro dip while oil prices gain
(…) “[I]nitial market enthusiasm was tempered by ECB President Draghi’s comments in the press conference that he ‘does not anticipate’ more rate cuts, based on the current economic situation. This statement led the market to price out most of the expected future rate cuts,” analysts at UBS said.
But Friday sees a more positive response as traders appear to welcome the central banks’ attempts to combat insipid inflation and boost economic growth. (…)
(…) On Thursday, the European Central Bank set out to dispel the doubts about its potency, with a set of measures aimed at helping ordinary businesses and consumers as much as markets.
The ECB’s big idea to silence the doubters is an auction of their cash that will — if it works — in effect involve central bankers paying banks to lend to businesses and households. Policymakers are praying these auctions, dubbed Targeted Longer-Term Refinancing Operations or TLTROs — will finally produce the meaningful recovery that the single currency area craves.
“The ECB has designed its suite of measures to have the most impact on activity,” said Karen Ward, chief European economist at HSBC Investment Bank. “[It] has changed the emphasis of its actions from depressing the exchange rate and relying on external demand and higher import prices to trying to fuel the domestic recovery by nurturing the banks to support credit growth.”
Mario Draghi, ECB president, hopes the package will quash any scepticism that central banks can only boost asset prices with limited benefit for the wider economy.
The ECB now has a package that would “exploit the synergies” between asset purchases and ultra-low interest rates, and the new auctions. He added that the new measures were “favouring pass-through from the banking system to the real economy.” (…)
The big question now is whether banks, businesses and households will bite.
The ECB will hold four auctions — one each quarter from June 2016 to March 2017. Banks can bid for cash of the value of as much as 30 per cent of their loan book. At most, they pay nothing on the four-year loans, which they will not have to pay back until 2020 at the earliest. But if the banks lend more, then the ECB will pay them up to 0.4 per cent interest on the lenders’ loans with the central bank.
Paying private banks to lend is novel, even for a generation of monetary policymakers used to rolling out shock-and-awe measures. Yet earlier designs of the TLTRO were touted as game changers and in the end proved much less effective than ECB hoped.
In a region drained of confidence, businesses and households might not want to borrow. Or banks could use the funds to invest in financial markets instead of expanding their loan books, pumping up asset prices but leaving the eurozone economy flat. (…)
3- High Yield market cheers up
European credit markets continued to rally on Friday following the European Central Bank’s surprise announcement that it would start buying corporate bonds later this year.
The cost of insuring against a default on European investment-grade debt fell to levels not seen since December, with investors piling into credit despite a lack of clarity over the size and scope of the ECB’s new corporate debt purchase program. It followed a sharp rally in corporate debt markets on Thursday after the program’s announcement. (…)
The annual cost of buying default protection on $10 million of European high-grade debt for five years using credit-default swaps, or CDS, fell around $12,000 to $71,000 Friday, according to Tradeweb. High-yield debt markets also rallied, and protection against a default on bank debt fell back to levels last seen in early January. (…)
The bank said in a statement it will start buying investment-grade, euro-denominated debt belonging to nonfinancial eurozone companies toward the end of the first half of the year. It has ruled out buying bank debt.
The corporate bond buying will be included in its broader asset purchase program, which has been expanded from €60 billion to €80 billion a month.
Strategists at Citigroup Inc. estimate there is about €500 billion in corporate debt that the ECB could buy. (…)
(FYI) From Deutsche Bank’s Torsten Sløk via The Big Picture:
40% of government bonds in Europe now trade with negative interest rates, see chart below. With this backdrop, it is not a surprise that US rates continue to stay low despite solid US economic fundamentals. Put differently, a very important driver of US rates continues to be the outlook for Europe and European rates.
4- Oil recovers
IEA Sees Signs Oil Prices Might Have Bottomed Out Crude-oil prices may have “bottomed out” as Iran’s return to the market has been less dramatic than the country promised, the IEA said.
Crude-oil prices may have “bottomed out” as Iran’s return to the market has been less dramatic than the country promised, and OPEC production fell in February, the International Energy Agency said on Friday.
Output is also falling faster than expected in countries outside the Organization of the Petroleum Exporting Countries, said the IEA in its closely watched monthly report, helping prices rise to more than $40 a barrel in recent days, up more than 40% from $28 a barrel earlier this year. (…)
The IEA said the forces that created a global glut of oil—2 million barrels are produced above demand on any given day—are showing signs of change.
American production, which surged for years on the back of hydraulic fracturing of shale formations, is forecast to decline by nearly 530,000 barrels a day this year, the IEA said. OPEC, the cartel that controls a third of the world’s oil, was beginning to show discipline after a period of increased production, with its output slipping 90,000 barrels a day in February.
And overall production outside of OPEC also was trimmed by 90,000 barrels a day in February to 57.1 million barrels a day, and is expected to fall by 750,000 barrels a day this year, the IEA said. (…)
Many traders and investors still doubt that the worst is over as supply is still overshooting demand and oil inventories around the globe continue filling up. Analysts have continued to slash their forecasts, with thirteen investment banks polled by The Wall Street Journal in February predicting Brent would average $39 a barrel this year, down $11 from the survey in January. (…)
Iran promised to flood the market with 500,000 barrels a day of new exports within months after international sanctions on its nuclear program were lifted. But in February, its output was only 3.22 million barrels a day—an increase of about 220,000 barrels a day over January.
“Iran’s return to the market has been less dramatic than the Iranians said it would be…provisionally, it appears that Iran’s return will be gradual,” the IEA said. (…)
Saudi Arabia’s output inched higher to 10.23 million barrels a day in February from 10.21 million barrels a month earlier, while Russia’s crude and condensate production fell by 25,000 barrels a day close to 10.9 million barrels a day.
Zerohedge seeks to curb enthusiasm:
on February 9, the IEA said “supply may exceed consumption by an average of 1.75 million barrels a day in the period, compared with an estimate of 1.5 million last month.” (…)
As Bloomberg writes, the agency’s view on prices is a shift from last month’s report, in which it said that crude could sink further as the market remained “awash in oil.” (…)
So while the IEA report served to boost the price of oil, roughly at the same time Goldman released its own report, reiterating a well-known warning on inventory constraints, and repeating that oil prices may drop “sharply lower” as US “storage saturation” is reached:
While supply responses and US stock draws on the horizon suggest price lows may have been set, the risk that US storage saturation pushes prices sharply lower in coming weeks remains high in our view. Current US inventory builds are setting new record highs for storage utilization and we expect these builds to continue through April.Further, the risk of petroleum product storage saturation pushing refinery runs lower in the face of strong imports could more than offset US production declines.
For now the market continues to ignore the near-term fundamentals, and to hope that production cuts and demand increases will normalize the crude market, even as key shale companies made it clear that once oil hits $40, production is going back on line. As of this moment, crude is right around that level.
5- China’s currency stabilizes
Yuan erases 2016 loss
China’s currency advanced to its strongest level since December after the country’s central bank raised its daily reference rate by the most in four months. The move comes as the People’s Bank of China finishes mopping up the extra liquidity it had injected into the banking system over the Lunar New Year Holidays. In a sign that the country is seeking to address its bad-debt problem, the central bank, along with the country’s top economic planning agency, are drafting rules that will make it easier for lenders to convert bank loans into equity stakes in debtor companies. (Bloomberg)
Last December 21, I wrote in YIELDING TO HIGH YIELD
In February 2015, valuation began to test the darker side, reaching 21 on the Rule of 20 in mid-May, a first indication that risk tolerance might be rising and that the we could finally reach the 22-23 levels on the Rule of 20 scale, culminating the “normal” valuation cycle.
I now believe that economic and financial conditions will not allow valuations to climax in the yellow zone, let alone reach the “Extreme Risk” area. In fact, investors are much more likely to seek safer grounds in coming months and downside to the 17.5 range on the Rule of 20 is quite possible as a result. At current earnings and inflation levels, this would take the S&P 500 Index down to 1825, 9% below current levels. Lower if inflation rises, and/or if earnings drop.
On Feb. 16, at 1866 on the S&P 500 Index, I penned UPGRADING EQUITIES TO 3 STARS arguing that
On the other hand, equities are undervalued currently and a change in investor psychology could result in a good rally given that the S&P 500 Index is now nearly 10% below its 200-day moving average of 2035. What’s needed now that U.S. recession fears are abating? Higher oil prices and better news from China.
Today’s pre-opening is 2012, bringing the Rule of 20 P/E to 19.1 (17.1 with Energy normalized) up from 18.0 just 3 weeks ago and only 0.6% below the 200-day m.a. of 2025 which remains in a downtrend.
With many of the recent econo-financial fears now seemingly shrugged off (!), earnings will matter again. We know that Q1’16 earnings look weak (-6.5% as per Thomson Reuters with 7 negative sectors). We also know that recent PMI surveys point to continued soft economic momentum.
We also know that margins are under pressure per the recent NFIB report.
Let’s see where this renewed enthusiasm takes us but prudence remains preferred. It is indeed late in the cycle and central bank blind experiments carry significant risks. This is a very volatile world…