Market commentary: Waiting on US Jobs and the ECB

With two major events in the coming days, markets have slowed down after this week’s rally. Global bourse have managed to eke out some small gains, but are likely focused on today’s employment data and next week’s European Central Bank meeting.

The former is one of the most awaited data releases in the US, particularly in the context of the upcoming Federal Reserve meeting and possible interest rate hikes. The ECB has talked up additional monetary policy easing, sending most European government bond yields lower and helping stocks recover from a torrid start to year.

The ECB meeting is perhaps the most prominent on investors’ radar. Markets have already priced a further 10 basis point cut in the deposit rate according to interest rate futures, but the recent worries about bank profitability in a negative interest rate world will likely be nagging at the back of policy makers’ minds.

Banks are much more systemically important in the EU, where capital markets are not as developed as the one in, say, the US. Banks therefore have a greater role in funding for consumers and businesses alike. With a European business landscape dominated by small and medium enterprises who would only have funding access through banks, the link between bank profitability, growth and employment is very much intertwined.

Market movers

Herbalife Ltd had an awkward moment on Thursday, saying it had (grossly) overestimated the growth of its customer and distributor base. Worldwide ‘active new members’ increased by 3.2% globally rather than the 16.7% initially reported, in one of more than two dozen misstated statistics. Herbalife shares were down by 7%, and are now 2% down for the year at $52.43.

Shrugging off concerns of a slowdown in the Chinese economy, Adidas is planning to expand its presence in China by 3,000 stores, bring the total up to 12,000. The sportswear giant has seen a 16% increase in fourth quarter sales in the region, and are expecting new government policies to foster the growth of the football industry.

House flipping is rearing its head after being in the limelight for all the wrong reasons in the run-up to the sub-prime bust. According to industry trackers flipping in 12 active US metropolitan areas last year was above a peak set in 2005. Home flipping tends to artificially increase home prices, making housing less affordable and fueling fears of a market bubble. Total home flipping in the US last year stood at the highest level since 2007, but don’t go for the panic button just yet – the number is more than 30% less than the infamous peak in 2005.

Trump gets slammed

Republican favourite Donald Trump got a verbal beating by former Republican presidential candidate Mitt Romney and John McCain. Romney didn’t mince his words, saying "Here's what I know. Donald Trump is a phony, a fraud. He's playing the members of the American public for suckers. He gets a free ride to the White House and all we get is a lousy hat,” in a reference to the promotional baseball hats being used for Trump’s campaign.

John McCain criticized Trump on some of his statements on national security, branding them as “uninformed and indeed dangerous”. More than 70 Republican national security leaders signed a scathing open letter opposing Trump and his stance on many foreign policy issues, including his calls to build a wall between the United States and Mexico, deport 11 million illegal immigrants and temporarily bar Muslims from entering the country.

Oil

Oil prices have been somewhat supported as of late, seemingly stabilizing in the mid-thirties. More than anything, the latest price moves can be attributed to talks of output cuts, or rather freezes, aimed at halting the increase in over supply estimated at around 1 to 2 million barrels per day. Some better than expected global manufacturing data also helped ease some concerns about growth, and thus demand.

While this may sound intuitive, the rally is defying the underlying fundamentals according to some analysts. Stockpiles or inventories, a well-known leading indicator, are rising. Global growth is slowing and, more importantly, production is not going to be cut, at least in any significant manner.

The large players in the oil market have managed to significantly lower their production costs across the years. Scaling down production in a bid to revive prices would subsidize players with a higher production cost, something which is not very feasible in an increasingly competitive market. Big guns such as OPEC members would rather force inefficient and higher production cost players leave the market (eventually), allowing prices to rebalance and rise (eventually) naturally.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.