Perspective: Morning Commentary, 02/12/2016

Friday, February 12, 2016


February 12 – Panic eased and the bears took a break overnight. Many Asian stocks remained under pressure, with the Nikkei 500 down nearly 5% after being closed the previous day. China will reopen Monday following its week-long Lunar New Year celebration. Even so, European stocks bounced amid easing concerns about the banking sector, with U.S. stock futures pointing toward a higher open as well. The rebound is welcomed following what has been a rough week. Deutsche Bank has been the focus of much of the selling in the banking sector in Europe, but its stocks were up 9% overnight. Much of the renewed strength in the banking sector comes from indications of insider buying, which eased concerns of traders about the health of the industry.


January retail sales grew 0.2% over the previous month, matching Wall Street expectations and certainly an improvement from the minus 0.1% seen the previous month. Sluggish auto sales had been a problem at the end of 2015, but they bounced a modest 0.1% in January, again matching market expectations. However, the more encouraging data showed that core retail sales that exclude autos and gas rose 0.4% in January, up from flat movement in December and beating market expectations of 0.1% growth.


The dollar surged on the retail sales number release this morning. The strength comes following another day of liquidation on Thursday that saw the dollar fall to its lowest level since October 22 as the yen rose to 15-month highs on carry trade unwinding, despite bearish fundamentals for the currency. In fact, Japan’s fourth quarter 2015 GDP is expected to print a minus 0.8% on Monday when our markets are closed for President’s Day, reflecting a contracting economy. As such, the recent trend for the dollar may have been sharply lower, but problems in Japan and Europe suggest that sellers of the dollar should exercise caution.


Eurozone GDP growth appears to have stabilized at a mere 0.3% growth for the fourth quarter, held up by Germany, which also saw 0.3% growth for the quarter. There’s been a bit more focus on Italy of late, which has the world’s eighth largest economy. Italy appears to have slipped back into a recessionary phase with minus 0.1% GDP for the fourth quarter. Unfortunately, these numbers do not yet reflect the full impact of the refugee crisis on Europe’s economy.


Crude oil bounced modestly overnight as producers lifted hedges, after West Texas Intermediate fell to its lowest level since 2003 on Thursday. The producer lifting of hedges provides another sign that we may be near the bottom. We’ve certainly been here before, only to fall to new lows on the next nugget of bad news. Even so, bottom-picker fears tend to diminish the closer to zero that a market comes. Support this time around is yet another round of rumors that OPEC may coordinate a production cut.


The rumors this time were sparked by comments made by the energy minister of the United Arab Emirates. I question whether meaningful cuts will be made, even if by chance they are agreed to by OPEC members. Yet, the talk plays well into shaping market sentiment and one of these times the idea of a possible bottom would be expected to spur demand talk. As such, I anticipate a period of considerable volatility as this market tries to find and confirm a bottom for the energy, as well as broader commodity sector. Supplies are large. That is known. The market wants to see that point where low prices stimulate sufficient demand.


This morning’s energetic rebound in crude oil supports a rebound in the broader commodity indices as well, leaving a double-bottom, at least for the time-being, on the Thomson Reuters CRB chart. Wheat sees modest short-covering after the Chicago market posted a double-bottom this week, but the grains as a whole continue to languish while waiting for a weather story. For today, we’ll take the consolidation ahead of a three-day holiday weekend, with the U.S. markets closed on Monday.


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