And That's The Week That Was

Market Matters…

Who would have thought tiny Crimea would have such an impact on the markets? (Two weeks ago, did investors even know that Crimea existed?) With the world awaiting a vote on a secession plan for Crimea to leave the Ukraine and rejoin Russia, investors engaged in a new “flight-to-quality” on the threats of military action. Secretary of State Kerry met with his Russian counterpart in an attempt to calm the tensions, but Putin and Co. remain resistant to any such Western “advice;” biz leaders in the region appear to be on their own to deal with the impact of US and EU sanctions in the form of travel bans and frozen assets. While such a move would not dramatically impact the domestic economy, the increased global pressures spooked investors into taking some profits from the prior few weeks’ gains. After a dismal start to the year, stocks have been on a tear as of late and the S&P 500 has climbed higher into record territory on news that the “winter weather” excuse may not be needed for much longer. Perhaps the pullback was timely (or so said the constant “too far too fasters”).

In the corporate world, Candy Crush maker King Digital Entertainment appears to be following in Zynga’s footsteps to the public offering world (how has that worked out for your shareholders, Zynga?). General Electric will be spinning off a unit that provides financing for retailers as Synchrony Financial is also now headed for IPO. Chiquita Brands and Irish Fyffes will be merging to form the world’s largest banana company in a $1.1 billion deal. Joe A Bank finally gave up on its fight to avoid a merger with rival Men’s Wearhouse as the retailer agreed to be purchased for $1.8 billion. Fannie Mae and Freddie Mac may be on the outs (finally) as Congress offered a plan to replace the quasi-government mortgage giants with a new federally insured program that would force private insurers to take losses before the gov steps in. General Motors continues to face questions about its delayed recall of vehicles with faulty ignitions that has resulted in several deaths over the past decade. Wall Street rejoiced over a potential return to the “good ol’ days” as the New York State Comptroller predicts a 15% increase in bonuses over last year’s levels.

Oil prices backed off from the (critical) $100/barrel to levels not seen in a month on supply concerns and worries that China’s economy may be far weaker than most expected. Domestic crude supplies have risen for eight straight weeks. Similarly, stocks reacted to the weaker Chinese data, while investors continued to monitor the Russia/Ukraine situation. A slow week on the domestic economic calendar gave many investors a chance to regroup and analyze the developments of the year thus far. Many have been on a roller coaster ride in 2014 and a “break” from the heated action may have been just what the doctor ordered. (Perhaps school spring breaks may have prompted a few vacations this week?) Fixed income was the primary beneficiary of the equity selling as the yield on the 10-year treasury dropped to 2.65%-ish as investors looked for the safe haven asset during the global uncertainties. (Guess these rubles are not looking too safe these days?)

Economic Calendar

While the domestic economy finally appears to be thawing out from the severe winter weather, China may be in for a rude awakening (and without the weather excuse). The week kicked off with Chinese exports dropping 18% from last year’s levels and analysts worrying about the overall strength of the economy. A poor GDP release raised even more concerns as news from retail, manufacturing, and housing created new uncertainties. Retail sales rose by a mere 11.8% last year, the slowest pace since February 2011 (many of our retailers would kill for such weakness). Construction starts plummeted by 27% and residential and commercial sales are on the decline as well. Bank of America reviewed the data and slashed its estimates for first quarter growth to 7.3% (from 8.0%). Somehow, the rest of the world feels little sympathy for 7%+ growth.

Elsewhere across the globe, Japan reported that its economy also grew at a slower-than-expected pace, putting a (temporary) halt to the newfound euphoria about the region. Europe’s manufacturing sector also pulled back in January as industrial production fell by 0.2% (vs. an expected 0.5% increase). The European Central Bank (ECB) tried to eliminate any concerns about the economy and, even more so, the potential for price deflation by claiming that its policymakers are prepared to implement non-traditional measures to counter any weaker currency.

Closer to home, analysts had somewhat of a break this week as the economic calendar was quite slow. Still, news from labor was favorable as jobless claims dropped to the lowest level since November and even the less-volatile four-week moving average continued to show improvement. Retail sales climbed 0.3% in February, another positive sign that the economy is picking up after a dreadful winter season and folks are finally able to get out of the house and back to the malls. The week ended, however, on news that a measure of consumer sentiment fell to levels not seen since November 2013.

On the Horizon…Fed Policymakers get together under the new guidance of Janet Yellen and most watchers expect no changes to the latest bond buying reduction strategy. Of greater significance, however, Fed watchers will be looking for any indications that policymakers give to raising interest rates (sooner than later) as the jobless rate and inflation rate are no longer major concerns. Global tensions will clearly remain at the forefront as the Crimea decision will prompt growing animosity between the Ukraine and Russia and the West may have to flex its muscle at some point with meaningful actions. The economic calendar heats up as key housing and manufacturing releases confirm or deny the need for the ongoing weather excuse. Investors continue their roller coaster ride as “bulls” and “bears” debate the next move in equities. After all, what has dramatically changed from the negativity of January that prompted the February rebound? Then again, what has dramatically changed from the optimism of February that prompted the recent pullback? (Oh yeah, Crimea?)

© Brounes & Associates