Week Ahead (March 10th)

The indexes posted the biggest weekly declines of the year, as investors fearing slowing world economy. Treasury yield dipped with the yield on the 10-year bond ending at 2.630% from 2.723% a week ago. Volatility advanced, with the VIX ending at 16.05 from 13.57 the week ago.

US trade deficit surges to 10-year high despite President Donald Trump’s efforts to reduce the number. The U.S. trade deficit ballooned in December to a 10-year high of $59.8 billion due to 2.1 percent increase in imports to $264.9 billion while exports fell 1.9 percent to $205.1 billion. Slowing global growth and a stronger dollar is also working against the trade balance. The trade deficit with China in December was by far the most of any nation. Where most investors expect the two countries to strike a trade deal later this month, there are also speculations that a deal may not be the sure thing.

Mixed U.S. economic data. Retail sales excluding autos slumped 1.8% in December 2018, the biggest drop since January 2000 and industrial production led to a 3.8% increase. Initial jobless claims fell to 223,000, against the market expectation of 225,000. Whereas job growth for February 2019 added just 20,000 payrolls, shockingly 160,000 fewer than the economic forecast. Housing starts rose 18.6% with single-family accounting for strongest tally and permits also increased 1.4% compared to December 2018.

Powell dismisses higher inflation rate and sticks to 2 percent inflation. Fed’s preferred inflation gauge has remained stubbornly below the central bank’s 2 percent goal for most of the economic recovery that began in mid-2009. Where Powell emphasizes on making 2 percent inflation target credible for both good times and bad times, on the other hand, Eric Rosengren, president of the Federal Reserve Bank of Boston says that Fed may need time to have clarity on US economy.

Eurozone annual inflation confirmed at 2 percent in August. Eurozone consumer prices accelerated to 1.5% in March, down from 2.2% in October driven by energy costs, services and food, alcohol and tobacco prices. Core inflation, which excludes energy and food prices, edged lower to 1 percent in February from 1.1 percent in last month. The lowest annual inflation rates were recorded in Croatia, Montenegro and Greece, whereas the highest annual rates were recorded in Turkey and Ukraine.

May’s Brexit vote is ‘on a knife-edge’. Prime Minister Theresa May is facing a crunch series of votes determining the course of Brexit and the U.K.’s relationship with the EU. May’s deal initially failed to win enough approval in Parliament in January because of widespread opposition to a key part of the deal known as the “Irish backstop”.

ECB pushes back rate hike plans. The bank kept interest rates on marginal lending facility and deposit facility unchanged at 0, 0.25 and -0.40 percent, however, updated guidance for a rate hike. These have been at record lows for years following the euro sovereign debt crisis of 2011 in an effort to boost inflation and stimulate growth.

China’s exports fell by more than 20% in February. China reported worse than expected trade data for the month of February. Dollar-denominated exports plunged 20.7 percent from a year ago, missing economists’ expectations of a 4.8 percent decline. And dollar-denominated imports fell 5.2 percent, missing an expected 1.4 percent fall.

The week ahead. China and U.S. to hold further discussions in Beijing after the National People’s Congress concludes on March 15. On Tuesday next week, lawmakers to vote for a second time on May’s Brexit deal after initially rejecting it in January.

Commodities

Gold prices bounced 0.05% for the week on weak February employment data. The 10 year U.S. bond yield continues to weaken and the dollar is showing signs of reversing its recent uptrend. Copper slipped 1.35% along with other base metals after the European Central Bank delayed interest rate rises to 2020 and promised cheap loans, pushing the euro lower and the dollar higher, and making metals more expensive for other currencies. U.S. Wheat futures took another hit this week on technical selling, reduced export demand for U.S. supplies, and increased prospects for competitor harvests later in the year. Looking at the two headline indices, Bloomberg Commodity Total Return fell 0.62%, whereas S&P GSCI Total Return rose 0.12%.

Crude Oil (Weekly Outlook: Slightly Bullish): U.S. crude futures fell 0.48% to about $56 per barrel, after data showed a slump in Chinese imports and exports last month and the European Central Bank slashed its outlook for economic growth on the continent. Chinese crude oil imports surged 21.6 percent to 10.23 million barrels per day, the third-highest volume on record. OPEC and its allies including Russia are trying to remove 1.2 million bpd from the market during the first six months of the year, following a collapse in crude prices in the final months of 2018. Number of oil rigs operating in U.S. fields fell for a third straight week, at a current level of 834.00, down from 843.00 last week and up from 800.00 one year ago.

Natural Gas (Weekly Outlook: Neutral): The natural gas market settled slightly higher during the week, reaching to the $2.87 level. Energy Information Administration’s weekly storage report failed to make much of an impact price-wise, with a larger-than-average 149 Bcf withdrawal from stocks that came close to market expectations. The 149 Bcf pull for the week ended March 1 compares with a 60 Bcf withdrawal for the year-ago period and a five-year average pull of 109 Bcf.

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ASOS fell up to 10% during the day.

Morgan Stanley analyst suggests that unless cash flows improve, ASOS may need to scale back its spending and growth ambitions.

ASOS plc (LON:ASC) could find itself uncomfortably tight on liquidity, Morgan Stanley analyst said. Maintains an ‘underweight’ rating and lowers his target price to 3,200p from 5,000p.

Morgan Stanley said the online fashion retailer is burning cash, having spent £400mn on CapEx in the last two years which is more than the previous 15 years put together. CapEx was mentioned by analysts before as an issue the company will have to overcome earlier this year. The company has revised guidance on CapEx upwards.

“ASOS had £173mln of net cash on its balance sheet in September 2016. However, it burned through £13mln in fiscal year 2016/17 and a further £117mln in fiscal year 2017/18, leaving it with just £43mln of cash in September 2018.”

The investment bank said ASOS has sufficient liquidity for the near future after increasing its borrowing facility to £150mln but expects £90mln of net debt in August 2020 when the company could find itself could find itself “uncomfortably tight” on liquidity ahead of peak trading.

“Unless cash flows improve, it may have to scale back its spending and growth ambitions,” Morgan Stanley said.

Morgan Stanley lowered its earnings forecasts by 7-17% over the next three years on higher depreciation and amortisation costs, meaning it sits 26% below consensus forecasts by fiscal year 2020/21. It said margins need to increase to 8% in 2020/21 for ASOS to meet its medium-term target but given the historical margin trajectory, “that feels demanding”. It doesn’t come as a surprise that ASOS may have to lower margins to maintain its current top-line growth. The trade-off between higher operating margin vs sales growth has been there for a while. ASOS has so far managed to maintain the 4% EBIT margin with the sales growth remaining robust.

“We now assume EBITDA margins will expand 50 basis points to 7.6% by the terminal year (previous estimate 200 basis points to 9.1%) contributing circa 75% of our price target revision.

“Combined with higher CapEx and tighter working capital we now expect £170mln cash outflow through FY2020/21 (previous £100mln inflow).”

In morning trading, shares fell 10% to 4,052p.

Ocado’s Shares Rise c. 30% and Touch Highest Levels Since March 2014

The Canadian retailer Sobeys has agreed to use Ocado’s e-commerce technology to expand its online business. This is the second deal since November when the company announced a deal with the French retailer Casino.

The 2 deals seem to make Ocado look like a technology company rather than a food-retailer. Ocado is an on-line only retailer operating in the UK market but the e-commerce technology seems to be attractive to many Brick And Mortar grocery retailers.  Could Ocado be the next Amazon for Food?

Posted by / January 22, 2018 / Posted in News

The Double Bind Faced By Greece – Global X MSCI Greece ETF

Greek debt crisis is a vicious circle. The Troika (EU, ECB and IMF) along with the Greek government do not seem to be able to make the Greek debt crisis a chapter in an economic history book any time soon as the involved parties fail to agree on a plan which will lead the country out of the 6-year crisis.

The 3 prerequisites for a complete and sustainable solution to the…. Read more at: http://bit.ly/2hpwS3o

Financial Crisis Of 2017 In The Making (Part 2)

Summary

Italian referendum has increased volatility but a “no” win could fire it.

Waiting for details of a possible settlement of DB fine from DoJ.

Brexit stance to become clearer within the first months of 2017.

Political landscape change and voters become less predictive.

All last week’s economic figures generally in line with estimates. Housing market figures in UK and unemployment rate in US slightly better than expected while initial jobless claims missed estimates.

Next week will be quite interesting starting with… Read more at: http://bit.ly/2gpwwJ6