Fed officials split over June rate rise Some members advocate waiting until 2016
Japan PMI data signal renewed economic downturn in March
At 49.4, the PMI survey measure of business activity across the manufacturing and service sectors hit a ten-month low. By falling below 50, the index also signalled the first monthly drop in activity since last October.
A lack of demand prompted firms to trim staffing levels for a second successive month, leading to largest (albeit still only modest) drop in employment since October 2012. However, although only minor, the drop in employment is a major setback for the economic recovery.
At the heart of the deterioration is a weakening of domestic demand. Service sector activity fell for a second successive month in March, attributed by survey respondents mainly to weak inflows of new business in home markets. (…)
OIL
-
Oil Slides as Supplies Soar Oil prices tumbled on Wednesday to their biggest loss in two months after data showed the largest weekly increase in domestic crude supplies in 14 years.
Wednesday slide was triggered by a report from the U.S. Energy Information Administration showing the nation’s crude stockpiles soared to a new record last week, posting the biggest increase in 14 years as oil production rose. (…)
U.S. crude production rose above 9.4 million barrels a day last week, the EIA said, near multidecade highs. The EIA said Tuesday it expects crude production to start declining in June. A Goldman Sachs report released Monday called for production to peak this month. (…)
(Stored supplies in Cushing, Okla., the delivery point for the Nymex contract, rose above 60 million barrels for the first time on record. Concerns have grown in recent months that Cushing inventories could hit maximum capacity, which the EIA said in September is 70.8 million barrels.
However, demand is expected to rise in coming months as drivers take more warm-weather road trips, and refineries typically buy more crude in the late spring to turn into gasoline and other fuels. The EIA on Tuesday forecast that U.S. crude stockpiles would start shrinking in June. (…)
But the WSJ article failed to report this from the same EIA release:
The EIA lowered its US crude oil production estimates for 2015 to 9.23 million b/d, down 120,000 b/d from its estimate a month earlier, and dropped its 2016 estimate to 9.31 million b/d, down 180,000 from its forecast a month earlier.
“The reduction in the crude oil production forecast reflects rig counts falling faster than EIA had initially expected, as oil-directed rigs have declined to the lowest level in more than four years as of late March,” the agency said. (Platts)
Oil rallies more than 2 percent after slump but sentiment weak
Most media missed this yesterday:
Saudi Arabia’s oil minister, Ali Naimi, was quoted just before the market’s close as saying the kingdom was willing to work with other major oil producers to stabilize world oil markets and boost prices, which he expected would “improve in the near future.”
But he made clear that Saudi Arabia, other members of the Gulf Cooperation Council and OPEC would not bear the burden of stabilizing markets alone. (Platts)
There is also this:
A glut of unplaced Nigerian crude is expected to flow to Europe hoping to find end user demand after weak buying from Asia for Nigerian and West African light sweet crudes over the past month has left a large overhang of March, April and May cargoes.
Demand from Asian buyers especially India, the biggest buyer of Nigerian crude, has been on the wane for May cargoes, and traders expect more Nigerian crude to land in Europe in coming months.
The focus on Europe has been further enhanced by reduced interest from Nigeria’s other regular customers like Brazil, Indonesia and South Africa.
WAF crude differentials have been falling in the past month as sellers tried to attract buying interest. But buyers are holding back in expectation of even lower prices. (…)
Meanwhile:
China’s domestic car makers helped power a 9% rise in first-quarter passenger-vehicle sales, showing new strength on the back of booming demand for Chinese sport-utility vehicles despite a softening economy.
Foreign and domestic auto makers sold 5.3 million passenger vehicles in China during the first three months of the year, the China Association of Automobile Manufacturers said Thursday.
The gain was led by Chinese homegrown brands, which reported combined sales of 2.3 million vehicles, up 21% from a year earlier. By contrast, foreign players sold three million vehicles, up just 1% from a year ago.
In the first quarter, the combined share of Chinese brands rose to 43% of the country’s passenger-vehicle market from 39% in the same period last year, said the government-backed auto manufacturers’ group. (…)
According to the research firm, Chinese SUV brands had doubled their sales to around 460,000 vehicles in the first two months of this year compared with the same period last year. This was more than foreign SUV brands, which sold around 360,000 vehicles, up 8%.(…)
Overall, growth in China’s new-car sales eased in the first quarter compared with the year-earlier period, when sales had risen 10%. (…)
SENTIMENT WATCH
Why Earnings Season May Not Be Horrible for Stocks The list of headwinds hitting U.S. stocks this year has grown long. Earnings expectations are downbeat, but this pessimism may be overplayed.
(…) RBC Chief U.S. market strategist Jonathan Golub, for one, believes everything is setting up for a very strong run in the market. To support his argument, he says the long-term earnings trend remains intact, expectations for rate liftoff have been pushed off, valuations have come down and the negativity tied to first-quarter earnings has been overstated.
Companies typically exceed earnings expectations about 75% of the time. And Mr. Golub is calling for larger-than-normal beats this season. “Analysts lowered numbers too much in the energy sector and are overestimating the currency impact,” added Mr. Golub.
Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, joins Mr. Golub in his thinking that the consensus is too pessimistic. “Investors should use any increased volatility to add to stock exposure in the more cyclical sectors,” said Mr. Wren.
The earnings outlook is not entirely upbeat across Wall Street though. Strategists at Bank of America Merrill Lynch Tuesday went so far as to forecast an earnings decline for the full year due to a stronger greenback and oil’s plunge. If that happens it would be the first annual profit decline since 2009, according to the bank, and would likely not bode well for stocks as the consensus across the Street is that earnings growth will return to record levels in the third quarter.
Even though Bank of America is not as optimistic as others, strategists there do see the earnings picture improving mid-year. “We do not expect the impact on [earnings] growth to get much worse from these levels and should start to fade by the second half of the year,” said Dan Suzuki, equity strategist at Bank of America. “The transient nature of the ‘earnings recession’ may explain why the market can end the year higher.”
If earnings beat consensus, as they have a tendency of doing, it should be a tailwind for stocks. Major averages fell in March in anticipation of a potentially rough reporting season. But, as the prior period showed, equities gained when results came in stronger than expected. After falling in January, the S&P 500 rallied an impressive 5.5% in February on the back of above-consensus results.
RBC’s Jonathan Golub does good work. He points out that
Bottom-up growth expectations of -4.2% seem quite ominous. However, when stated ex-Energy (and assuming beats) the result is likely to be 6–7%, plus buybacks.
Relatively low negative company guidance in the last month tends to support the view that surprises will surprise on the upside. I will be more interested in the guidance going forward, however.
European Stocks Need to Show Earnings Power European stocks have raced higher. The importance of seeing earnings rise is now paramount.
(…) There is no doubt that European equities are no longer obviously cheap, trading on a multiple of around 16.6 times the next 12 months’ earnings, according to FactSet. (…)
While earnings for S&P500 companies are some 23% above their precrisis peak, for Stoxx 600 constituents they are 26% below, and have largely stagnated since 2010, FactSet data show. But there are some signs of hope. The fourth-quarter saw earnings rise 8.9% year-on-year, J.P. Morgan Asset Management notes. Analysts have become more bullish: Europe excluding the U.K. is the only region where earnings upgrades are outstripping downgrades, Citigroup notes. But the backdrop for earnings is good, particularly for exporters that benefit from a weaker euro. (…)
Hong Kong Housewife Cheers Stocks as Workers Trade at Lunch
(…) “Things are getting quite exciting,” said Chow Man, a 68-year-old housewife who favors Chinese banks and infrastructure stocks and says she has as much as HK$200,000 ($25,000) in play. “It’s becoming like a hobby for a lot of mainland investors to trade stocks now. That’s why more of them are taking opportunities in Hong Kong.” (…)
“The rally may last for a few more days,” said the security guard, who’s hoping stocks will rise another 10 percent. “I’m just taking a lunch break to do some trading because the market is hot.” (…)
From Zerohedge:
No, that chart is fine, and nothing is wrong with your eyes: that was, indeed, until a few minutes ago, a 10% move in just the past two days!
From BNP Paribas via Zerohedge:
“Margin purchases are now accounting for almost 20% of equities daily turnover which itself has soared to wholly unprecedented levels in another sign of self-feeding speculative frenzy. What happens next is clearly an ‘unknown-unknown’. By definition detached from fundamentals, speculative bubbles are inherently re-enforcing in the short-term and frequently last longer than expected. The longer they continue, however, the larger the eventual bursting.”
There appears to be little doubt that this particular speculative bubble has indeed before “re-enforcing,” because as we showed last week,the pace at which Chinese investors are creating stock accounts has accelerated with nearly 1.7 million accounts created in the last week of March alone (up 50% from the previous week which itself saw a 58% spike from the week before). Compounding the problem is that many new market participants lack even a junior high-level education suggesting that they may not be adequately assessing the risk factors. As we put it: “We certainly don’t see what could go wrong here. Last month alone, a new investor base the size of Los Angeles — many of whom may be only semi-literate — piled into Chinese equities which have nearly doubled in the space of 8 months on the back of margin debt that can now be measured as a percentage of GDP and volatility is at a 5-year high. Everything should be fine.”
Rising Optimism Fuels Deal Rebound At the current pace, M&A volume for the full year would exceed $3.7 trillion, making it the second-biggest year in history.
(…) And after a decade of productivity gains and cash hoarding, many companies are in search of new earnings sources. Mergers and acquisitions of rivals can deliver that through margin improvement and growth opportunities, says Blair Effron, co-founder of Centerview Partners LLC.
The deal-advisory firm has worked on some of this year’s biggest mergers, including the combination of Kraft Foods Group Inc. and H.J. Heinz Co., valued at more than $50 billion.
“Executives in all sectors are saying: ‘We have a good stock price, a good financing market and our business is well in hand. It’s time to think about something more expansive, like M&A,’ ” Mr. Effron says. (…)
To be sure, deal making is still running behind the pace of 2007, when companies struck $4.3 trillion worth of combinations. Helping to boost the numbers then, private-equity firms made acquisitions at an unprecedented clip.
Such activity is lower now partly because some of those deals fell short of expectations. The current M&A wave is centered around traditional company-to-company mergers.
Deal volume as measured by number of transactions remains sluggish. A total of 9,932 mergers has been agreed to so far this year, compared with 10,861 in the same period in 2014. (…)
Beset by concerns over the health of some of its weaker countries, deal activity in Europe is lagging despite the boost from the BG deal announced Wednesday.
At the height of the M&A boom in 2007, activity was busier in Europe than the Americas. (…)
In an interview Wednesday, Scott Wine, chief executive of vehicle maker Polaris Industries Inc., said: “The strength of the dollar doesn’t always help in selling our products, but it does help when we’re looking to do acquisitions, especially outside of the U.S.” (…)
Apple Watch Review: You’ll Want One, but You Don’t Need One
Bespoke
