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Wednesday, February 24, 2016

A Go Figure Bounce

Financial Review

A Go Figure Bounce

DOW + 53 = 16,484
SPX + 8 = 1929
NAS + 39 = 4542
10 Y – .01 = 1.74%
OIL + .36 = 32.23
GOLD + 3.00 = 1229.40

Stock markets closed down in Asia and European shares dropped the most in two weeks. Investors continue to use oil prices as a gauge of the global economy. At an event in Houston on Tuesday, Saudi oil minister ruled out production cuts anytime soon, sending crude sharply lower despite talk of a mid-March oil producer meeting. New API figures showing a further build in U.S. stockpiles are also weighing on oil. Oil’s retreat, together with slowing growth in China, has dragged down global stocks about 8% since the start of the year.

Miners fell again, with Glencore and BHP Billiton losing more than 8% on the day. Statoil and Royal Dutch Shell were leading energy-related companies lower. Iran said the plan to freeze oil production was “ridiculous.”  Every member of the Stoxx 600 Banks Index declined.

For most of the session today, Wall Street was down. The Dow Industrial average started the morning with a 250-point drop, and was down about 150 points for most of the session, until the final hour of trade when suddenly and without much reason, stocks turned higher, oil turned higher, treasuries turned lower, and gold tanked. I wish I could offer some clear reason for the turnaround, but I haven’t really seen anything to explain the move. About 3 weeks ago we saw a turnaround that erased a 1.5% loss in the S&P; over the following week the index lost 3%. Go figure.

How low could the pound go? The British pound is worth less than $1.40 for the first time since 2007. While currencies move for a variety of different reasons, most speculate the drop this week is to do with uncertainty over the Brexit referendum in June. The pound fell hard on Monday after London Mayor Boris Johnson decided to support the UK leaving the European Union. Britons get to vote on whether the UK should stay in or leave the European Union in the EU referendum on June 23.

The dollar index is at 97.5, and trading in a range between 95.5 and 100. If the dollar can just hold steady at these levels. A stable dollar would be a boost to multi-nationals, commodity traders across the board, and almost everybody except American tourists. The strength of the dollar might well be determined by the direction of the Fed.

It is “still too early” to assess the implications of recent volatility in financial markets for the U.S. economy, so says Fed Vice Chairman Stanley Fischer. With regards to the FOMC’s upcoming policy meeting in March, Fischer said he couldn’t predict what officials are going to do “because, as I’ve emphasized in the past, we simply do not know.” Still, Fischer thinks there is a chance the recent sell-off on Wall Street may not damage the economy.

Meanwhile, Richmond Fed President Jeffrey Lacker said there is more room for the Federal Reserve to raise interest rates because the current level remains below the economy’s so-called natural real rate of interest. And Kansas City Fed President Esther George says it’s too soon to say whether the stock market selloff had “fundamentally” altered the outlook, and a rate hike should “absolutely” be on the table for mid-March. She even suggests that the Fed could surprise markets with a hike.

Investors currently view the probability of a single rate rise in 2016 at around 45 percent, according to trading in federal funds futures contracts. The FOMC next meets on March 15-16, and the best bet is that the Fed will hit the pause button.

For evidence, we look to the Fed minutes from the January FOMC meeting: “Almost all participants cited a number of recent events as indicative of tighter financial conditions in the United States; these events included declines in equity prices, a widening in credit spreads, a further rise in the exchange value of the dollar, and an increase in financial market volatility. Some participants also pointed to significantly tighter financing conditions for speculative-grade firms and small businesses, and to reports of tighter standards at banks.”

Purchases of new homes dropped more than forecast in January. Sales declined 9.2 percent to a 494,000 annualized pace after a 544,000 rate in December that was the strongest in 10 months. The supply of homes increased to 5.8 months from 5.1 months in December. There were 238,000 new houses on the market at the end of January, the most since October 2009. The median sales price of a new house declined 4.5 percent from January 2015 to $278,800.

Markit Economics’ monthly flash services purchasing manager’s index, a preliminary reading on the sector, fell into contraction for the first time in over two years. The tentative February index was reported Wednesday at 49.8. That’s below 50, the border between expansion and contraction. The services sector, which covers about two-thirds of the economy, is essentially having its worst month since the recession. The only exception is when the government shutdown disrupted business activity in October 2013.

The US is exporting liquefied natural gas. The first shipload is pulling out of port in Louisiana right about now. The United States expects to transition from a net importer of gas to a net exporter by 2017 as the nation’s shale gas production continues to grow. For now, prices remain low, around $2.61 per million British thermal units in 2015, the lowest annual average since 1999; and there is a glut. The first shipment is headed to Petrobras in Brazil.

Sugar futures on the Intercontinental Exchange staged their biggest daily gain in nearly 23 years, jumping 8.9% to settle at $0.139 a pound, after forecasts suggested supply may fall short of demand due to bad weather conditions. This year’s supply loss will be the first deficit in five years as harvests are hit by the El Nino weather phenomenon and heavy rain in Brazil, the world’s largest producer.

Brazilian police have charged the chief executive of Samarco – a joint venture between BHP Billiton and Vale – and six others with criminal homicide following the collapse of the miner’s dam last November that killed at least 19 people. The report concluded that the accident was caused by excess water in the dam, lack of proper monitoring, faulty equipment and failure in the drainage system. The police report also said that Samarco’s emergency plan to warn nearby villagers was insufficient.

New York State’s comptroller and four Exxon Mobil shareholders have asked the SEC to force the company to include a climate change resolution in its annual shareholder proxy. The move, the first since the Paris climate accord, ratchets up the tension between the oil producer and investors concerned that climate change or legislation designed to curb it will harm the business’s ability to operate profitably. It also comes as Exxon fights an inquiry by NY’s attorney general into whether it misled the public and shareholders about climate change risks.

Sharp’s board has begun a two-day meeting to decide if it should accept a $5.9 billion takeover by Taiwan’s Foxconn Technology. That figure is more than double the offer by the Innovation Network Corp of Japan, which was previously considered the more likely suitor for Sharp due to its government backing.

Viacom has launched a process to explore a strategic minority investment in Paramount Pictures, after being ranked last among Hollywood “majors” at the box office for four straight years. The news comes as the company faces pressure to consider spinning off assets from its core TV business.

Target posted a fourth-quarter profit of $1.4 billion, helped by a gain on the sale of its pharmacy and clinic businesses and lower overhead expenses.

Lowe’s said profit dropped in its latest quarter following its decision to exit an Australian joint venture, though adjusted earnings rose and the company offered upbeat guidance for the year. Last month, the home-improvement retailer said it would sell its 33.3% stake in an unprofitable Australian home-improvement store venture to Woolworths.

Chesapeake Energy reported its fourth-quarter loss widened and it unveiled further capex cuts and asset sales. The company said it had a net loss of $2.23 billion.

Airbus Group posted a 15% rise in profit for 2015 and reported sales grew 6%. Airbus and Boeing have enjoyed a prolonged period of high aircraft order bookings as airlines renew aging fleets and add planes to deliver growth. Investors have increasingly become concerned, though, the boom period may be nearing an end. Despite those worries, Airbus said it would lift production next year of the A330 wide body to seven planes a month from six.

The pharmaceutical group GlaxoSmithKline has been fined $3 billion after admitting bribing doctors and encouraging the prescription of unsuitable antidepressants to children. Glaxo is also expected to admit failing to report safety problems with the diabetes drug Avandia in a district court in Boston on Thursday.

The company encouraged sales reps in the US to misrepresent three drugs to doctors and lavished hospitality and kickbacks on those who agreed to write extra prescriptions, including trips to resorts in Bermuda, Jamaica and California. The company admitted corporate misconduct over the antidepressants Paxil and Wellbutrin and asthma drug Advair. GSK also paid for articles on its drugs to appear in medical journals and supposedly “independent” doctors were hired by the company to promote the treatments.

German luxury automaker Audi has topped the annual ranking of new vehicles by Consumer Reports despite the brand’s emissions-cheating scandal. In November, Audi admitted using separate software that allowed its diesel U.S. SUVs and larger cars to emit excess emissions.

Tesla’s Model S electric car was named Consumer Reports’ best overall car in 2014 and 2015, but this year the magazine opted not to name any best overall vehicle.

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