Market commentary: dollar concerns

Oil prices found an unlikely ally in New York Fed President William Dudley who dropped a proverbial bombshell, quoting “tight financial conditions” and “further strengthening of the dollar” as potential catalysts for a reconsideration of monetary policy expectations as early as next March.

With the current volatile scenario it did not take very long for the dollar and the markets to respond – the US currency weakened considerably across the board and commodities such as oil and gold rallied. Stock markets were mostly positive – London was up but Germany was down, and US markets closed slightly in the green – as the news is in itself not very comforting in terms of global growth.

Market Update

More woes for the banking sector as shares in Credit Suisse sunk around 13% to a 24 year low (yep, years) upon revealing its first full-year loss since 2008. CEO Thiam warned of challenging times ahead, echoing calls made earlier this year by Deutsche Bank and UBS.

The Swiss company cited uncertainties on Chinese growth, the abrupt drop in oil prices, large mutual fund redemptions and the impact of divergent central bank policies amongst the reasons for the bank’s dismal performance.

Globally, the financial sector is the worst performing in the MSCI World Index. The S&P 500 financials are the worst performing major sector this year, down nearly 12%. The sector is the worst performer in the Euro Stoxx 600 index during the past month, dropping almost 20%.

Energy explorer Conoco cut its quarterly dividend for the first time in almost 25 years, further lowering its capital budget for the current year. The largest independent oil company in the US saw its shares fall 8.6% as it reported a bigger-than-expected quarterly loss. Analyst Morgan Stanley (MS) capped off a dismal week for the energy sector when it further slashed its already bearish outlook on oil. MS now sees Brent crude averaging $29 towards end of year, compared with 3-week old estimates of $59.

Honda is recalling another 2.2 million vehicles in the US because of potentially explosive airbags. The latest round of recalls by the Japanese carmaker involves 5 million vehicles globally. Honda also stopped dealers from selling certain vehicles according to a document sent to dealers. Shares in Honda were roughly unchanged following the announcement, but airbag producer Takata Corp was down 4%. The recalled vehicles include newer model years, up to 2016.

Rugged camera maker Go Pro is having a rough time. After posting a huge $34.5 million loss last quarter, the company fired its Chief Financial Officer and cut its product lineup to just 3 cameras. Investors didn’t seem to warm up to the idea though – shares fell almost 9% yesterday and have retreated a massive 89% from the peak hit in September 2014, just a few months after the company’s IPO. Sales slowed dramatically in the holiday season and fell 31% over the past year. The company took a $57 million write down in unsold and unwanted stock sitting on store shelves.

LinkedIn has baffled investors with confusing jargon and slower forecasted growth. The company unveiled a new strategy dubbed “hunter-farmer” which failed to woo investors, in fact resulting in quite the opposite. LinkedIn shares fell a massive 30% to $134 dollars. On balance this would seem like quite a surprising move, considering that the company estimates imply a growth of, wait for it, 21% as opposed to 35.2% in 2015.

Good Heavens, Mark!

As of yesterday the US Federal Reserve is the only central bank which will, or should I say might, raise interest rates this year. Bank of England (BoE) Governor Mark Carney headed for the exit in the latest Monetary Policy Committee (MPS) meeting, announcing a lower inflation forecast of just 0.8% this year.

The MPC assessed the risks to this forecast as “skewed a little to the downside in the near term, reflecting the possibility of greater persistence of low inflation”. Interesting fact – exactly 3 years ago the then latest Inflation Report by the BoE had warned that “inflation will stay above the Bank's target of 2pc until early 2016”.

That effectively killed any hope of a rate hike from the UK central bank , although calls for a cut were dismissed by Carney who insisted the next move in rate will “more likely than not” be up from the 7-year record low of 0.5%.

The BoE cited a turbulent global economy and concerns about inflation stemming from plunging oil prices and slowing growth as major concerns. Weakness in pay growth was also pointed out as a concern, so much so that the only member of the MPC who had previously voted for a rate hike in the last meeting reversed his decision.

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.