Market Recap: Earnings, The Fed, and More Negative Yields



It was a pretty positive week for global equities and it is surprising how quickly we have shrugged off last Friday’s disappointing payrolls report. For the week the S&P added +1.7% while small-cap stocks were up +0.7%. The fireworks were to be found in China with Chinese H-shares soaring about +11%. The Chinese government has made it easier for domestic investors to buy stocks traded in Hong Kong, and money is flooding in.


Oil prices were once again exceptionally volatile, gaining 5% on the week. The daily swings are nuts – up 5% one day, down 6% the next. Prices rallied this week despite some pretty bearish supply numbers:


1) Saudi Arabia reported record production of 10.3 million barrels per day (MBP) in March.


2) U.S. oil field production remained at 9.4mbp during the first week of April following a seven-week climb. Production has gone off the charts the last few years (see below).




3) As a result inventory levels continue to soar.  U.S. crude oil inventories surged 10.95 million barrels in the last week – three times more than expected – to a modern-day record 482.39 million last week.  The increase in stocks far surpasses what we’ve seen the last few years (chart below).




Finally, bond yields ticked higher in the U.S., but the moves were modest. The yield on the 10-year increased 0.05% to 1.95% and intermediate-term government bonds lost -0.3% while high-yield bonds increased +0.9%.


The Market Can Only Focus on Two Things at a Time


The on-going joke about the markets is that it really can only focus on two things at a time, and sometimes that is a stretch. A couple months ago it was all Greece all the time. Before that it was all about Syria. Now if we ignore the fact that a good chuck of Wall Street is watching the Masters, the two issues in focus today are:


Corporate Earnings


Earnings seasons started this week and there is a fair amount of angst about what corporate America has to report. The table below shows current earnings expectations. For the S&P 500 as a whole earnings are expected to contract by -2% in the first quarter. At the beginning of the year earnings were expected to grow 7% – so we have had a 9% swing in the matter of three months (far right column).


Much of the decline is attributable to energy as you would expect. Energy estimates have fallen by -47% in 2015 YTD, and earnings are now expected to fall -64% in the first quarter. However, even if you exclude energy, S&P expectations have fallen -5%.




Reports ramp up in earnest next week and it will be interesting to see if expectations have overshot on the downside.


Fed Policy


Of course the other big issue concerns the Fed – will they or won’t they raise rates later this year? The minutes from the last meeting came out this week and they showed conclusively that……well…..the Fed doesn’t know themselves.


The committee is apparently split several ways over the right moment to start lifting rates, with some advocating a move as soon as June while others suggest waiting until later this year or into 2016. So something for everyone then!! Certainly any hike will depend on whether the economy bounces back from the first quarter lull. As Janet Yellen herself has said:


“The actual path of policy will evolve as economic conditions evolve, and policy tightening could speed up, slow down, pause, or even reverse course depending on actual and expected developments in real activity and inflation.”


So basically she’s saying “Don’t bug me….we are going to do what we do when we want to!!” but more and more analysts are coming around to the view that the first hike might not happen till next year. Bank Credit Analyst for one is arguing this point:


“(This) analysis…suggests that unless there is substantially more progress made toward achieving its inflation and employment mandates, the Fed may elect to defer the first rate hike into next year. Moreover, even once rates begin to rise, the glide path is likely to be fairly shallow, reflecting the inherent uncertainty about the underlying resilience of the economy and the appropriate level of the ‘neutral’ rate.”


So more of the same. Economic data improves – the betting on an earlier tightening go up. And conversely, weak data pushes out lift off date. But that won’t stop the market fixating on the issue.


European Yields Push to New Lows


So while investors remain fixated on a Fed that doesn’t know what to do, bond yields continue to melt in the European sun. Two examples this week:


1) The Spanish Treasury issued short-term debt on Tuesday yielding a shade under 0%. The €725 million ($796 million) in six-month Spanish debt delivers an average yield to investors of -0.002%. Buyers were so excited about the opportunity the issue was 5 times oversubscribed!! The chart below shows the amazing ride Spanish bonds have been on. Back in 2011 six-month yields hit 6% when the worry was about Spanish bankruptcy. Now we are paying them to take our money!!




2) This week “Switzerland become the first government in history to sell benchmark 10-year debt at a negative rate.  They sold about $240 million of 10-year bonds priced to yield -0.055%.  Again the issue was oversubscribed.  As you can see below, yields have plunged the last few years.




Bonds with negative yields have become one of the world’s fastest growing asset classes.  About 30% of Europe’s sovereign bonds now have negative yields, as you can see below.




The immediate implication of plunging bond yields in Europe is further dollar strength this week.  After Friday’s jobs number the dollar sold off hard against the euro.  However, this week it rallied +2.5% against the common currency.  As you can see below, this dollar rally is becoming one for the history books.




Real Estate Madness


Mish Shedlock has been blogging forever, and he is always good for a bearish take on most things. He had a great recap of price differentials between homes in France and Australia this week.


For example, the following quaint cottage can be had for 519K euros or about $550K. 14 bedrooms, pool, a chapel, and a library in Vienne France.




Alternatively, there’s this one bedroom appartment in Elizabeth Bay for about $1 million.  Oh, and no parking by the way.




The whole article is pretty good (Link)


Guess I better start brushing up on my French.


Charles Email Sig