Equity markets advanced notably in a holiday shortened week both in the U.S. and abroad. U.S. markets notched their largest weekly gain of the year and posted a back to back daily 1% gain for the first time since October 2011. Europe rallied over 4% on news of reassuring regulatory bank capital guidelines and a confident debt buyback from Deutsche Bank while Japan, Australia, and China also posted strong gains. The rally was most pronounced in the industrials, technology, and consumer discretionary sectors with the most heavily shorted stocks rallying sharply, a clear sign of a short covering across the hedge fund community.
A light economic calendar saw more positive surprises than negative by a good margin including broad strength in industrial production, lower jobless claims, and both PPI and CPI beating low inflation expectations. Core CPI in particular is accelerating over 3m (2.54%), 6m (2.30%), and year over year (2.21%) time periods. Meanwhile, housing and manufacturing reports were mixed. Homebuilder sentiment and housing starts missed expectations while the Empire Manufacturing report posted a seventh consecutive month of contraction. Oil found some footing last week, posting a small gain on news of potential cooperation on production freezes among non-U.S. producers, namely Saudi Arabia and Iran.
Encouraging comments from the People’s Bank of China governor, a slightly stronger reset of the yuan’s exchange rate, and encouraging Policy announcements contributed to a more constructive outlook on China’s trajectory. The U.S. dollar strengthened again last week offering relief to U.S. multinationals and exporters. Friction between equity markets and market expectations for U.S. Fed rate hikes will likely continue to be a focal point as we move toward the March Fed meeting. Economic data points and financial market behaviors will both factor into the decision. High yield spreads tightened on the week but not the same degree of recovery that took place in the equity markets. Energy spreads are approximately 1860 while the overall high yield market is 820.
