Friday, April 10, 2015

Corporate Deals Rally Markets, US Dollar Recovers

QUICK READ: Several mergers and acquisitions by top companies helped buoy equities in what was a somewhat choppy week on the markets. After gold rallied to a  seven-week high on Monday, the precious metals spent the rest of the week giving up these gains before paring their losses on Friday. Meanwhile, the dollar bounced back from an early swoon to advance against the euro and yen.

Another uneven week of trading on the U.S. markets has revealed the truly top-heavy character of the stock market, and speaks to the potential that it is in a bubble. Monday somewhat strangely saw both equities and the precious metals rise in reaction to last Friday’s dismal non-farm payrolls numbers. It seemed both asset classes were responding to the dollar swooning, as the USD fell below 96.5 on the DXY index, nearly 4% off its high for 2015. On the day, stock indices added about 0.66% each, while gold jumped to a seven-­week high above $1,220/oz. The other precious metals each gained about 1%.

Monday also saw the euro advance for the fourth straight day, as optimism abounded about the Greek debt situation. Not only did the Greeks promise to pay (and followed through on Thursday) their next loan bill to the IMF on time, but Finance Minister Yanis Varoufakis outlined a few simple points that he sees as essential to a deal with the rest of the EU. This transparency and open dialogue (and not to mention a good faith payment) is a vast improvement over recent rhetoric, helping boost shares across Europe.

Tuesday saw stocks ride a nice rally all afternoon only to crash back to about unchanged by the end of the trading day. This was attributed to hesitance ahead of Wednesday’s release of the FOMC meeting minutes. The minutes were taken as somewhat hawkish: the Fed committee was divided on whether rates should indeed be hiked sooner (in June or September) or should be held off until later (perhaps as far out as 2016). As usual, this perceived hawkishness was balanced by important players at the Fed stressing that the eventual rate hike will be “shallow” and “gradual” in nature.

Wednesday also saw crude oil prices get slammed more than 6% lower on the revelation from the EIA that U.S. inventories rose by more than 12 million barrels last week when only about a 3 million barrel increase was expected. The growing supply glut pushed WTI crude and Brent crude back to the $50/bbl and $55/bbl ranges, respectively. The plunge in oil also coincided with a resurgence for the dollar, which advanced back near 98.0 on the DXY. Thursday saw equities lifted by a midday rally, which had less to do with this week’s jobless claims report and more to do with the rolling four­-week average for jobless claims, which stood at a 15-­year low. Though stocks responded well to the data in the labor market, this is far from the whole story: the labor participation rate still sits at its lowest level since 1978. Moreover, half of the trading volume on the U.S. stock markets on Thursday was made up by just the top 2% of listed companies.

All the while, the precious metals followed up Monday’s boost by trickling lower throughout the week. Wednesday saw the metals fall sharply on the dollar’s bounce-­back, with gold parking back at its support around $1,200/oz, and silver plunging through key levels back to $16.50/oz. The DXY registered near 99.5 again on Friday, while the metals again fluctuated, advancing back to their previous levels before Wednesday’s sell­-off.

While the euro and yen both fell against the robust dollar by week’s end, global markets were pushed higher by a series of large M&As: FedEx acquired a large distributor in Europe (that UPS previously tried to purchase in 2009, but was blocked by Congress) and is expected to receive approval; Berkshire Hathaway bought Axalta, a company specializing in coating systems for automobiles; and Royal Dutch Shell acquired BG Energy, a major competitor, in a massive $70 billion deal. With the bottom potentially in for crude oil, we have been seeing more mergers and consolidation in the energy sector. There has been remarkably little M&A activity in tech, however, which is concerning to some experts.

In addition to shares rising in the U.S. and Europe, the Nikkei 225 briefly hit a fresh 15-­year high around 20,000 before the main Japanese stock index pulled back slightly overnight on Friday. (The Nikkei remains well off of its all­-time high of almost 40,000, reached at the height of the country’s economic bubble in the late 1980s.) Shares were strong across Asia, and Hong Kong is rapidly approaching parity with Japan as the world third ­largest stock market (in aggregate value) behind China and the U.S.


A LOOK AHEAD: 


Industrial production in Italy, which was on the rise in 1Q, will be announced on Monday, along with CPI numbers from India. Tuesday is chock full of data from the U.S. and abroad, including CPI from Italy and the U.K.; eurozone Industrial Production; GDP, Retail Sales, and Industrial Production numbers from China; and the PPI for Final Demand and Retail Sales numbers in the States.


By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.