Market commentary: Bank of Japan kicks off Central Bank meetings week

The good news for markets is that Tuesday’s over, and that Wednesday is looking better. Major equity markets were dragged down yesterday as weak US retail sales data (more on that later) and a bleak outlook by the Bank of Japan (BoJ) reignited fears of a global slowdown. The Japanese yen strengthened across the board, oil and copper kept falling and emerging market shares fell the most in a month.

But perhaps the most significant trigger for the day’s performance was the change in the language used by the BoJ in its statement. A mere six weeks after the shift into negative rates and a pledge to take rate seven more negative if need be, the Japanese central bank dropped that language from its statement, causing market participants to somewhat re-evaluate their expectations of future monetary stimulus from the BoJ. In a move resembling the one seen mid-way through last week’s European Central Bank press conference, equity markets sold off and yields on most sovereign bonds also ticked higher.

Central bank meetings are the dominant item on the agenda this week. The US Federal Reserve's two-day policy meeting ends on Wednesday (expect a statement at around 8pm local time) and meetings of the Bank of England and the Swiss National Bank are scheduled for Thursday. Markets have – for the good part of the last decade – grown accustomed to guidance from major central banks and even slight deviations from consensus expectation can have the power to move the markets significantly.

Legal woes in Wolfsburg

In more miserable news for Volkswagen (VW), CalPERS and other institutional investors are suing the Wolfsburg automaker for almost $3.6 billion in damages over its handling of the emissions scandal. A separate legal firm has also filed a suit on behalf of individual investors, alleging that VW did not live up to its legal requirements of informing investors of potential trouble with its diesel engines. Hundreds of vehicle owners have also filed class action lawsuits. Did I mention that US authorities are suing over approximately 600,000 cars fitted with the notorious ‘cheating’ emissions software?

VW have made provisions for $7.4 billion to cover recall costs, but analysts are estimating the fallout in fines and lost sales at more than $20 billion. Let’s just say that the line item ‘legal costs’ in VW’s financial statements will be closely watched, to say the least. Shares in the German automaker have fallen by a third since September 17th, the day before the scandal broke out.

Valeant – A Day in the Life of Bill Ackman

If there ever was a day to be Bill Ackman – or any other Valent shareholder for that matter – it certainly wasn’t yesterday. On Tuesday, shares in the pharmaceutical company plunged 51% as it cut its forecast for 2016, reported a weak fourth quarter and – wait for it – said it risked breaching certain debt agreements if it didn’t file its annual reports in time.

Valeant said it must file its 10-K return by March 30 to avoid triggering cross-defaults that would restrict it from being able to further tap its credit line. A series of earnings and revenue restatements dating back as far as 2014 mean that it probably won’t be able to meet that deadline.  and will begin asking lenders next week to amend the credit agreement so that a default is waived.

Shares closed at $33.54, more than 87% lower than a peak hit last August. Bill Ackman, one of Valeant’s top shareholders lost an estimated $750 million on the day. Bondholders were also hit as Valeant’s 6.125% 2025 debt – the most actively traded corporate bond on Tuesday – fell around 12% to 77 cents on the dollar.

Fed decision day

Retail sales in the US fell in February, although the big worry was the hefty downward revisions to January data highlighting risks to the current economic outlook. However, rather than throwing the US into recession this data will at best soften expectations of a rate hike in the immediate future. Indeed, the labour market in the US remains strong and inflation is improving.

Consequently policy makers at the US Federal Reserve are seen keeping rates on hold in March but signalling that the next rate hike is not far off, presumably in June. Fresh forecasts from the Fed's 17 officials released after the meeting ends on Wednesday will likely signal three or possibly two rate hikes this year, a slower path of rate hikes than the four 2016 rate hikes envisioned in December, the last time forecasts were published.

Investors will also be keenly looking at the ‘tilt’ of the Fed’s assessment of risks to their outlook. Risks were “balanced” in December when the Fed raised interest rates, but it removed that wording in their last meeting in January. Forward guidance has become crucial for the markets, and the Fed tends to avoid creating too much uncertainty about the future path of interest rate. The message, bar extremely negative developments in the next quarter, should be this – brace yourselves, rate hikes are coming.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is 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 & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.