Weekly Recap | Oil Prices Collapse & Holiday Shopping Season Begins!

We had more action in this Holiday-shortened 4th week than we
had in the entire month of November! 
If you missed the incredible action, here’s your chance to catch up
before Monday’s Opening-bell!

OPEC’s decision to refrain from a
production ceiling cut drove most of the trading action this week. As
the cartel confirmed on Thursday that it would not reduce its 30M bpd
production target, oil prices plummeted to multi-year lows dragging down
energy related equities, and oil-leveraged currencies like the Ruble and
Norwegian Krone hit multi-year lows. 

The move in oil reinvigorated the broader
market debate about whether the biggest impact of cheap energy will be the
benefit to consumers or the threat of creating a deflationary wave. This was
further substantiated by more weak CPI readings out of Europe and Japan.

The other big trend of the week,
the start of the holiday shopping season, got off to a solid start with
preliminary Thanksgiving Day and Black Friday sales showing
good year over year growth. The second read on US Q3 GDP came in better than
expected, further validating the US as the leading edge of the economic
recovery.

For the week, the DJIA rose 0.1%,
the S&P500 gained 0.2%, and the Nasdaq added 1.7%.

Third-quarter US economic growth
was revised higher in the preliminary GDP reading, to +3.9% from +3.5% in the
advance reading, well ahead of the +3.3% expected. The economy has
grown at or above a 3.5% quarterly rate for four out of the last five quarters,
although many observers suggest this pace of growth is not sustainable. Spending on investment in housing and by business
grew strongly over the advance reading. 

In other US data, the headline
October durable goods was up very slightly, driven up by a spike in bookings
for military aircraft, but the core business investment segment looked weak.
October personal income and spending was slightly lower than expected but
bounced back from September’s flat reading, returning to the steady rate of
growth seen over recent months. The PCE series, the Fed’s preferred measure of
inflation, was pretty much flat in October.

Oil prices fluctuated in the first half of the week as major oil producers
horse traded ahead of Thursday’s OPEC meeting in Vienna. Prior to the meeting,
oil ministers from Saudi Arabia and Venezuela met with non-OPEC nations Russia
and Mexico to discuss falling prices. The four countries, which together
account for about a third of global oil production, agreed to
“monitor” prices and come together again in three months to assess
the market. 

Interestingly,
Rosneft CEO Sechin, the de facto oil tsar of Russia who was at the four-party
meeting, said that even oil prices falling below $60/barrel would not force
Russia to cut production. As the week
wore on, it became clear that OPEC would not cut its production ceiling, and
after the official announcement on Thursday crude futures plunged nearly 10%,
dragging down oil-related equities. OPEC took the stance that the cartel does
not want to give up market share and put the onus on the “new”
players (i.e. North American shale oil) to reduce their production to stabilize
the oversupplied market. For its part, OPEC indicated it may better enforce the
cartel’s 30 million bpd targeted production ceiling, which could trim 300
thousand bpd of overproduction if members adhere to their quotas. Brent crude ended
Friday testing the $70/barrel level and WTI finished around $66/barrel.

Earnings reports were mixed this week. Deere’s fourth-quarter results were
stronger than expected but declined on a y/y basis, while the initial FY15
outlook was not very positive. The firm warned that farm equipment sales and
profits would keep falling in 2015, but on the conference call insisted that
next year would represent the trough in the cycle. Hewlett-Packard shares
surged to a fresh three year high as headline results were about in line, but
underlying trends continued to improve. Executives said that for the first time
in several years HP saw operating margin expansion in every one of its business
segments. Tiffany shares rose on Tuesday despite a slight miss on the top and
bottom line for Q3 and trimming its fiscal year revenue guidance. Same store
sales in the Americas region were a bright spot for the luxury retailer, rising
in 11%, helping to offset a drop in Asia comps.

For the forex market, disinflation remained a key theme in both Asia and
European. Dealers note that decline in oil prices following the OPEC meeting
would make it even more difficult for central banks in Europe and Japan to push
up inflation. Emphasizing that issue, the Euro Zone Nov Flash CPI estimate came
in line with expectations, but matched a 5-year low. The focus is now turning
to next Thursday’s ECB rate decision for any hints that the central bank would
be the next to carry the QE baton. ECB council members have stated that they want
more time to assess the effects of prior stimulus measures to materialize, but
European bond yields moved back to record lows in both core and peripheral
nations on QE hopes.

The Shanghai Composite was lifted to fresh 3-year highs of 2,650 this week by the
momentum of last Friday’s surprise interest rate cut. PBoC has solidified the
easing bias of its “prudent” policy stance with more cosmetic
liquidity injections. On Tuesday, the central bank’s offering yield in its
14-day repo operations was reduced by another 20bps to 3.20% – the 4th such cut
in the cycle. Then on Thursday, PBoC deferred on further regular drain for the
first time in 4 months, resulting in the net weekly injection of CNY35B, the
biggest in 3 months. Increasingly proactive monetary policy has been further
justified by more instances of deteriorating economic data out of the mainland,
as China October industrial profits slumped by 2.1% y/y – the biggest decline
since August 2012. Meanwhile in Hong Kong, the diminishing support for the Occupy
Central movement has finally emboldened law enforcement to retake the protest
site, as police moved in to clear the Mong Kok area, arresting student leaders
and over 100 of their followers.

In Japan, the BOJ released the minutes from its controversial October policy
meeting, when the central bank unveiled a fresh round of Quantitative Easing in
a tight 5-4 vote. The minutes revealed that the dissenters feared the side
effects of more QE, reinforcing the depth of the split in the policy committee
and also suggesting the minority camp is well-entrenched in its position to
take a less aggressive approach. Separately, the Cabinet Office November report
maintained its overall economic assessment, but lowered its view on the
Employment segment for the first time in 2 years. On Friday, Japan core CPI
figures marked fresh multi-month lows, as slumping oil prices offered stiff
resistance to the weak Yen in expanding Japan inflationary trend.