We now have a clear technical picture of the stock market as the central banks threw in the terrible tightening towel in December. Stocks and junk bonds have rallied higher in tandem for six weeks to solidify that the December low will hold.
All rallies come with corrections and a new one started on Thursday. Not to worry, the PPT (Plunge Protection Team) is likely on call and don’t forget that the Fed has taken a time-out from raising rates so this pullback may not last a fortnight.
Otherwise, the yield curve is behaving and the economic data is just cool enough to keep central banks across the globe in their cage (see more below). Not too hot, not too cold – just simmering in our stew of liquidity.
What to look for next week:
- Continued economic data releases that play catch-up from the government shutdown.
- A move higher in equities to start the week followed by a larger corrective move to the downside.
- Political tensions regarding a deal or no deal on border security which may take the blame for the upcoming pullback.
Chart of the Week!
Economic & Central Banking Snippets
- US Factory Orders tumbled 0.6% MoM which is the first consecutive monthly contraction since June 2016.
- Soaring food costs drove Turkey’s inflation rate higher in January as their central bank struggles to control prices before local elections next month. Food prices increased 6.4% month on month, pushing the annual rise to 31%!!!
- Eurozone businesses started out 2019 with their weakest growth rate since mid-2013 as a slowdown in services weakened for the first time in more than four years. IHS economist Chris Williamson says the PMI points to Q1 economic growth of 0.1%, much slower than the 0.4% projected in a Reuters poll last month. (Seeking Alpha)
- China’s services sector maintained a decent pace of expansion in January offering some support as manufacturing cools. Caixin/Markit’s services PMI dipped to 53.6 from 53.9 the previous month, but well above the 50.0 mark separating growth from contraction. (Seeking Alpha)
- The January PMI in Singapore has fallen to no growth at 50.1 from 52.7 in December as “The underlying trajectory of Singapore’s economy took a turn for the worse during January, as PMI data revealed a further loss of growth momentum. (Markit)
- The Bank of England (BOE) has retreated from plans for multiple interest rate rises as it downgraded its economic outlook amid mounting Brexit uncertainty and slowing global growth. (FT)
- A secret group at the heart of the UK government is drawing up plans to kick-start the British economy in the event of a no-deal Brexit, through options that range from cutting taxes and boosting investment to slashing tariffs. The plan, dubbed “Project After” by some ministers, is being marshalled by Mark Sedwill, who as cabinet secretary is head of the civil service. (FT)
- Italy’s industrial production fell in December as a recession begins for the third-largest eurozone economy. In line with some dire economic figures from Italy, the European Commission on Thursday slashed its 2019 growth forecast for the economy. (FT)
- The Reserve Bank of Australia has cut its forecast for the country’s growth amid weak consumption growth, global trade tension and a worsening outlook for the Chinese economy. GDP estimates were cut from 3.25% to 2.5%. (FT)
Macro Snippets
- Peter Altmaier, Germany’s economy minister, has called for the creation of a state investment fund that would step in to pre-empt foreign takeovers of big German companies, the latest sign of growing protectionist sentiment in Berlin. The proposal is part of a new industrial strategy designed to create “national and European champions” that are better able to compete with tech giants in the US and Asia, and to build up German competence in critical new technologies such as artificial intelligence and electric vehicles. (FT)
- Interserve, one of the biggest suppliers of UK government services, has been saved in a debt-for-equity swap that hands control of the business to its banks. The contractor, which employs 75,000 people worldwide including 45,000 in the UK, said on Wednesday that lenders had agreed a deal that will see shareholders effectively wiped out and left with just 2.75% of the company. (FT)
- The deep freeze in the U.S. last week exposed some of the limitations of electric vehicles. Owners of Tesla, Nissan and Jaguar electric vehicles reported a loss of range of as much as 30% amid the recording-setting low temperatures associated with the Polar Vortex. The problem is that lithium-ion batteries, in general, are most efficient at about 70 degrees. Still, there is optimism that the next generation of EV batteries will dramatically improve performance, although “solid state” batteries aren’t expected to be mass produced until 2022 at the earliest. (Seeking Alpha)
- Puerto Rico‘s restructuring deal that wipes out a third of its $18B in sales-tax bond debt received court approval Monday, making headway in fixing its broken finances, the Wall Street Journal reports. The write-downs on the revenue bonds known as Cofinas will save the island’s government $17B in interest and principal payments in the coming decades. Creditors holding over $14.5B in Cofina debt supported the deal. (Seeking Alpha)
- Germany’s antitrust watchdog blocked Facebook from pooling data collected from its social platforms and third-party websites without user consent in a landmark decision on internet privacy rights. The Federal Cartel Office said it was cracking down on what it described as the Silicon Valley company’s “practically unrestricted collection and assigning of non-Facebook data” to users’ accounts. (FT)
- Venezuela’s opposition leader Juan Guaidó will name a new board for the country’s U.S.-based Citgo Petroleum, U.S. Sen. Marco Rubio, (R., Fla.) said, in a bid to starve the Maduro government of income from the country’s oil, which provides most of its revenue. Citgo is a major U.S. refinery that is owned by state oil giant Petróleos de Venezuela SA, or PdVSA. Citgo is being forced to consider the possibility of bankruptcy and other contingency plans in the fight for control of Venezuela’s assets. (WSJ)
- Johnson & Johnson will start giving the list price of its prescription drugs in TV ads, becoming the first pharmaceutical company to do so. The Trump administration has been pushing for this sort of disclosure, but drugmakers have argued back that few actually pay such high list prices. All seven major pharmaceutical players have agreed to testify to the Senate on February 26 about drug pricing. (Seeking Alpha)
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
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Regards,
Paul J. McCarthy, III
President – Kisco Capital