Trade the News Weekly Market Update: Cold Weather, Cold War

– The S&P 500
notched new all-time closing highs this week and not even the prospects of war
in Ukraine managed to unseat the relentless bid. Ukraine became a central issue
after Russian troops occupied Crimea without a shot fired and the Ukrainian
province prepared to legitimize the move via referendum. 

In Europe, ECB
President Draghi was more hawkish than expected and resisted calls to offer
additional accommodation or even say the word deflation. At China’s National
People’s Congress, Beijing unveiled its official 2014 targets, most notably
maintaining the 7.5% GDP objective for the third year in a row and set the
inflation target at 3.5%. 

Meanwhile, China’s Feb manufacturing PMI fell to an
eight-month low of 50.2, just a hair away from contraction. For the week, the
DJIA rose 0.8%, the S&P500 gained 1.0% and the Nasdaq added 0.7%.

– On Monday, Russia’s MICEX index fell 11%, the DAX was down as much as 3% and
the CAC fell as much as 2.5% as Europe responded to Russian escalation over the
weekend. The ruble was in free fall, prompting the Russian central bank to
raise its key lending rate to 7% from 5.5%. At its worst, USD/RUB rose as high
as 36.6, the ruble’s weakest level since the 1998 currency crisis. 

An air of
unreality surrounded Russian statements about the situation, as Putin denied
that Russian troops were even participating in the occupation of Crimea (he
said the troops were just extraordinarily well-armed local Russians). The
Crimean parliament asked Putin to start the procedure of formally allowing
Crimea to join the Russian Federation and scheduled a referendum for March
16th. Ukraine called the moves illegal and promised to hold on to the
peninsula. Europe responded by threatening to consider sanctions, while the US
is actively establishing a limited sanctions regime and sending token military
assets to the region.

– The February jobs report took markets by surprise on Friday. After the ADP
miss (at +139K jobs v +155Ke) and various weak employment components from
February regional Fed reports, many participants were assuming the Labor
Department report would be terrible. On Thursday, Fed Governor Lockhart said he
did not expect to see an outstanding jobs report. But in the event, the Feb
NFPs roundly beat expectations (+175K v +149Ke) and the unemployment rate
ticked up one-tenth to 6.7%. The biggest surprise in the data was a 0.4%
increase in average hourly earnings, the largest increase since last June,
while average hours worked fell, likely due to distortions caused by weather.

– The February ISM manufacturing data was slightly better than expected, rising
to 53.2 from January’s nine-month low of 51.3. The key new orders component saw
solid gains, rising to 54.5 from 51.2 prior. Note that the weakness in December
and January was chiefly seen in the new orders component.

– February auto sales numbers are the latest economic data to be impacted by
winter weather. Ford and GM both saw sales decline on a y/y basis, although
total unit sales were more or less in line with expectations. Sales executives
from both firms cited the weather as restraining sales. Chrysler’s sales grew
11%, and executives said the weather only helped sales of their Jeep line,
which were up 47% y/y. Nissan’s sales grew 16% y/y, although this was a bit shy
of expectations.

– In earnings news, shares of Radio Shack are down 20% this week after the
troubled retailer reported brutally bad fourth quarter results, with losses
three times the year ago figure and retail comps down 12%. Homebuilder
Hovnanian dragged down the entire sector after it missed revenue expectations
and racked up an unexpectedly large quarterly loss. The firm’s contract
cancellation rate crept up and its net contracts signed metric fell y/y. HOV is
down 17% while fellow luxury home builder KBH is down nearly 10% this week.
Costco missed top- and bottom-line expectations in its second-quarter report.
The price club’s same store sales held up well, up 2% overall while US comps
were up 4%. Earnings fell y/y, dragged down by weak margins in the holiday
season and tough FX conditions.

– Safeway announced a formal merger deal with Cerberus’s Albertsons after a
long courtship. The $40/share price values Safeway at more than $9 billion.
Note that there have been reports that Kroger is still mulling a higher offer.
A Deutsche Bank analyst wrote that Kroger should bid and that Safeway could
fetch a price above $40.

– The ECB resisted calls to fight disinflation with more easing at its policy meeting
on Thursday. EUR/USD was steady after the ECB left rates on hold and refrained
from launching any new programs, and then moved sharply higher, testing 1.3850,
once it was clear that ECB President Draghi would merely reiterates familiar
positions at the post-rate decision press conference. Draghi said that recent
improvements in the eurozone obviate the need to halt SMP sterilization. On
Friday morning, EUR/USD moved even higher, probing briefly above 1.3920 to its
highest level since late 2011. The euro weakened after the US jobs report.

– China has now witnessed its first corporate default in history. Shanghai
Chaori Solar Energy is looking to sell overseas assets to make up a missed bond
payment and neither banks nor government entities are stepping in to help.
Chaori’s default took place during the annual People’s Congress session,
reinforcing the signal that Beijing is letting market forces play a stronger
role in the economy. However analysts point out this is only the beginning
given that the number of Chinese companies with debt levels double equity has
surged since the financial crisis began.