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A better week but traders have the upper hand

Brouwer & JanachowskiFebruary 19, 2016

A short week and, with China closed the prior week, we thought markets may regroup. And they did. The U.S. market rose around 4%, U.S. small caps by 5% and major international markets by around 4%. We don’t usually like to show weekly market moves...there's a high signal to noise ratio, but here it is:

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That big move is oil. But it’s the spot price. Storage and refining capacity affect the spot price more than fundamental supply and demand. Global storage capacity has increased a lot in the last few years and there might be some worker shortages as well. Still, the recent sort-of-well-we-might agreement between Saudi Arabia, Russia, Venezuela and Qatar to freeze production helped sentiment.

Elsewhere, this was important:

  1. Central Banks: sorry, yes, again. We keep returning to them because there’s no major economy presenting fiscal ideas (although there are plenty of people who think we should, here and here), so we’re entirely dependent on monetary policy. Over at the Fed we had:
      1. An extremely dovish set of minutes from the January meeting recording concerns about markets and downside risks. We don’t think those have changed much since then.
      2. Speeches from the new Philadelphia Fed president, the Boston Fed and St Louis Fed all saying they have concerns and any renewal in rate increases would be “unwise”. We think they're tracking the markets more than leading it. But it takes rate increases off the table for six months. Hey, the Fed might even be in sync right now?
      3. At the ECB, we heard President Draghi acknowledge the banking problems and stood “ready to do its part”. He didn’t day what that part was but it's probably more QE and a further cut in its already negative interest rate.
  2. Bonds: one swallow and all, but we saw some demand for credit from corporate borrowers, including a big one from Apple. Borrowers try to time their new issues, when they think markets are stable so some good news there.
  3. U.S. Economy: slight healthier inflation, a better industrial production report (but still concentrated in a few industries so, as we noted, there’s no concern about dispersion), good retail sales and a feeling that some of the manufacturing bad news may be turning.

It feels volatile, yet…

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We’re not huge fans of the VIX or “fear index” because it’s a second derivative indicator, but it does show that volatility has settled and the worst of the selling pressure may be over.

Bottom Line: Earnings expectations and sentiment are very low. When these turn, they turn extremely quickly. The U.S. looks better than most other places and valuations are modest.



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--Christian Thwaites, Brouwer & Janachowski, LLC

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