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I was asked several times over the weekend what the implications of the Panama Papers were for global markets. The short answer is I don't know, but there are several implications for the markets that need to be considered.
1) More bank regulatory scrutiny? To the extent that banks were facilitators of these offshore accounts, it would add impetus to more regulatory scrutiny.
2) More scrutiny by U.S. prosecutors of foreign banks? It looks like several subsidiaries of European banks were among the more active creators of these offshore accounts. U.S. prosecutors have already initiated fines and sanctions against foreign banks for violations of U.S. laws. This may provide additional information for even more scrutiny.
3) More regulation/taxation in general? This will provide even more ammunition to those on the more hawkish side of regulatory and tax issues — Sen. Elizabeth Warren of Massachusetts is a good example — who will use this to argue for even more bank regulations and higher taxation of the wealthy.
By the way, while much of the focus appears to be on political figures hiding (potentially) ill-gotten gains, it appears that one of the most common uses of these accounts is for a much more mundane purpose: to hide assets due to a divorce settlement.
Stocks are mixed today, and volatility is flat and trending down, and that may be a surprise to a lot of people. The market had reasons to go down. Stocks have been strong and are somewhat overbought. On top of that, we have a strong dollar and weak oil today, two traditionally toxic combinations for stocks.
But stocks are mixed, with the S&P flat. What's going on? The Fed's dovish posture and today's economic data is a positive for stocks.
The March nonfarm payroll report was mostly inline with expectations, with no major revisions. That moved the dollar up, putting some pressure on commodities and commodities stocks.
As the first quarter comes to a close, one sector notably stands out in the negative column: biotech. The iShares NASDAQ Biotech ETF, a market-cap weighted basket of biotech stocks, is down 24 percent this year. Unlike most of the market, it never participated in the mid-February bounce.
Let's look at just the biggest names, the biotech stocks in the S&P 500. All of them have performed terribly this year:
Vertex: down 37 percent
Regeneron: down 33 percent
Alexion Pharma: down 29 percent
Biogen: down 17 percent
Celgene: down 17 percent
Gilead Sciences: down 9 percent
Amgen: down 8 percent
Pretty ugly, eh?
Fed Chair Janet Yellen's uber-dovish speech Tuesday is already being felt in international markets. The renewed dollar weakness is affecting trading, as the yen strengthened overnight, and the Nikkei dropped 1.3 percent.
Elsewhere, many emerging market currencies, including the Chinese yuan, gained on the weak dollar. Expect further inflows into emerging market funds like the EEM. Foreign inflows into emerging market stock and bond funds hit a 21-month high in March.
Europe is trading in a more risk-on mode, with autos like BMW and Daimler up roughly 3 percent, and oil companies like Total and ENI bouncing back from Tuesday's losses. Banks like UniCredit are lagging.
The weaker dollar is helping commodity stocks like Anglo American, which is up 13 percent in London trading
Technology and energy are leading in early trading in the U.S.
Why isn't the market rallying more? I've heard this several times since Janet Yellen's uber-dovish speech to the Economics Club of New York.
I'm a bit baffled by the question. The S&P has risen nearly 20 points today and is now at a post-recovery high.
What else do you want?
First off, one of the reasons the market rallied in mid-February was because everyone thought central banks would be more dovish on the global slowness. That's exactly what has happened.
More important is the psychological impact of Yellen's comments. This is a shot in the arm for a market that is modestly overbought and oversold.
Most investors just want the bigger picture. Most average investors sitting in mutual funds just want to be assured that they're not going to be scared to death and go back to new lows in the next month.
Yellen's comments have made this much less likely.
What happens from here?
1) Lower volatility. The earnings picture is not pretty, as I have emphasized. But, the cause of much of the recent volatility has not been earnings, it's been the Fed. The Volatility Index is collapsing, poised to close near its lows for the year.
2) The dollar rally is likely over.
3) The pain trade has now changed, from lower to higher. The Fed is again putting a floor under the market. You can argue about how much higher stocks go, but this is like the old Bernanke put, only now it is a Yellen put.
4) It will not likely be a growth rally. Global uncertainty reigns. The dollar no longer rising is good for short covering in materials and energy, but nobody is rushing to buy these sectors for long-term investing, not until supply and demand get closer together. Investors still love dividends, so telecom and utilities are not going anywhere. And banks will still have trouble rallying with lower rates and a flatter yield curve.
Of course, there's lots that can still go wrong, principally the global economy. But Yellen's speech made it clear that: 1) she is in charge, 2) she is more dovish than ever, and 3) if things fall apart, they won't hesitate to go back to the old Fed and cut rates again, buy bonds, or do whatever it takes.
Stocks rose and the dollar weakened Tuesday on Fed Chair Janet Yellen's speech to the Economic Club of New York. It was not only dovish, it was full of terms that suggest hesitancy, such as "slower," "weaker" and "cautiously."
"I consider it appropriate for the committee to proceed cautiously in adjusting policy," she said.
"Reflecting global economic and financial developments since December, however, the pace of rate increases is now expected to be somewhat slower," Yellen noted.
"[F]oreign economic growth now seems likely to be weaker this year than previously expected, and earnings expectations have declined," she said.
It wasn't all cautious. During the question and answer session, she highlighted that the U.S. economy has proven "remarkably resilient."
The S&P 500 rose nearly 10 points as her initial comments were released.
The weaker dollar briefly caused a rise in commodities and commodity stocks. Big oil names like ExxonMobil and Chevron, which had been weak all day on weak oil, came off their lows, but soon fell back. The same held true for materials names like Freeport McMoran .
While the broader market rose on her comments, bank stocks moved down as bond yields declined.
Three weeks ago, I noted that the IPO window would likely open up shortly because the biggest single factor for IPOs — the state of the overall stock market — had rallied 9 percent from its Feb. 11 low, a dramatic improvement in less than a month. I even listed likely candidates who would be first out of the gate!
Three weeks later, I'm still waiting. Three weeks later, not only has the market not rolled over, the S&P is up another roughly 3 percent.
So, market conditions continued to improve, but we don't see any IPOs. We will end the quarter with nine IPOs: seven biotech firms and two medical device companies (this includes one company this week), the lowest number since the first quarter of 2009, according to Renaissance Capital, the IPO authority that runs the Renaissance Capital IPO ETF (IPO).
And still we get excuses. This time, it's the Easter holiday: Slow last week and this week, people are still off. Now we're going into spring break. More people off.
For several weeks, the market risk has been to the upside. That may be changing, albeit slowly.
It's not very obvious, just staring at the market. The sideways action of last week is generally viewed as a positive way for the market to work off the slightly oversold conditions.
Today, stocks are split on extremely low volume. The Volatility Index (VIX) is flat.
But as we close out the first quarter and enter earnings season in the coming weeks, there is a bit of unease. It centers around several factors:
1) The market is not cheap. Current estimates for 2016 earnings on the S&P 500 are $120.58, according to Factset and have been dropping all quarter, which would put the S&P 500 at roughly 17 times earnings, a tad above its long-term average.
2) The earnings multiple has high risk to the downside because earnings have an unusually high degree of uncertainty. First-quarter earnings are expected to be down 8.7 percent, the largest decline since 2009, according to FactSet. This would be four straight quarter of earnings decline, and five straight quarters of revenue declines. And we are still not expecting growth until the third quarter of 2016!
3) GDP forecast has weakened. CNBC's Rapid Update now sees first-quarter GDP up a measly 0.9 percent, a significant drop from expected growth of 1.4 percent.
Given this relatively muted economic and earnings climate, it's surprising how edgy traders are about three prominent Federal Open Market Committee voters speaking this week, led by Janet Yellen, who is speaking in New York on Tuesday. Traders believe that Yellen still wants to keep the possibility of a spring rate hike alive; if that happens, the dollar will certainly rally and put further pressure on dollar-sensitive sectors like energy, materials, and industrials.
This, of course, is in direct contradiction to the earnings and economic uncertainty outlined above.
Bottom line: we are in a transition phase for the markets. After a week or so of sideways trading, the catalysts for a move higher (weak dollar, dovish Fed, better economic news) seem more muted than a few weeks ago.
My colleague Steve Liesman has published a report on the government's quarterly GDP report. Summed up, he found a large, persistent error in GDP between initial and final GDP reports. Not only is it off significantly, the government even gets the direction of growth wrong 30 percent of the time!
Why is economic forecasting still so bad? Many feel that the tools being used to make the forecasts are simply inadequate. There are people trying to bring economics into the 21st century. They're using big data to make "the dismal science" less dismal.
One of them is Giselle Guzman, CEO of Now-Cast Data Corp, which is applying machine learning, big data and crowd sourcing to economic forecasting. They are trying to fuse economics and computer science.
"From my perspective, both the government and most human economists have the same problem—they are using old methods from the 1950's!, Guzman told me.
Giselle has a PhD in Finance and Economics and worked for 17 years with Nobel Prize winner Lawrence Klein, a pioneer of modern economic forecasting. She was also a research assistant to Nobel Prize-winner Joseph Stiglitz.
I wrote about her—and her track record—in Trader Talk in October.
On her website, subscribers can pull up a dashboard of roughly 4,000 indicators on virtually every kind of economic activity, which provides tables of all the predictions and a graph of the predictions placed over the actual numbers.
The coolest part is you can watch predictions for several indicators, including predictions for Consumer Price Index, Producer Price Index, and Consumer Spending—update in real time, part of a program called LiveWire. And I mean real time—by the second.
Think about that. The Fed updates its estimates once a quarter, and most federal economic data comes out once a month.
What's the "secret sauce?" Guzman tells me there are several components:
1) A "wisdom of crowds" approach. The Internet is the perfect vehicle for exploring what people are really worried about and how they really feel, rather than what they say they are worried about or feel.
2) Sophisticated algorithms that quantify those behaviors, but also calculate the economic impact of geopolitical events, natural disasters, and even acts of terrorism.
3) The constant improvement of forecasts using machine learning. It's like a self-learning system. The inputs are constantly changing. Traditional economists have a "model" that is static. This is dynamic. The formulas are changing depending on what happens. Think of data as evolving, as a living organism. As the data evolves, the relationships between data change.
Guzman claims her predictions are far more accurate than traditional economic forecasting methods.
For example, the consensus estimate for the January Consumer Price Index (CPI) was negative 0.1 percent for a month over month change. Now-Cast was at 0.0 percent. It came in a 0.0 percent.
The February CPI consensus was -0.3 percent month-over-month, Now-Cast was minus 0.14 percent. The reported number negative 0.16 percent.
When I wrote about Now-Cast in October, I concluded by saying that what I would like to see is analysis of her forecasts against the predictions of the top strategists on Wall Street.
That hasn't happened yet, but a post on their website claims to have nailed over 40 economic indicators for February.
"Now we have enough data to treat economics like a real science, not a pseudo-science," Guzman says.
Programming note: Guzman will speak on Closing Bell at 3:10pm ET Thursday.
Is the Fed confusing the market? The dollar index has now risen four days in a row, and commodities and commodity stocks are now coming under pressure as certain Fed speakers try to keep rate hikes on the table.
It was a beautiful narrative: the FOMC last week clearly reflected a dovish tone, implying two rate hikes in 2016, while modestly upgrading the state of the economy. Only Esther George of Kansas City, a hawk, dissented.
But that narrative is starting to change, for reasons that are confusing the market. This morning James Bullard, head of the St. Louis Fed and an FOMC voter, implied in an interview that an April rate hike was possible. He joins Patrick Harker from Philadelphia Fed, a hawk and nonvoter, who also said April was on the table. Charles Evans and Dennis Lockhart, while both nonvoters, also made hawkish comments recently.
My colleague Steve Liesman wrote about this last night, noting that Fed Chair Janet Yellen may have a "mini-revolt" on her hands.
This has only become more relevant now that Bullard, who is a voting member and perceived to be a centrist, has come out and implied the Fed may be getting behind the curve.
Bullard appeared to have an immediate effect on currency and commodity markets this morning: the dollar strengthened, and commodities dropped, with copper down 1.8 percent, gold down 2.5 percent, oil down 3 percent.
Predictably, materials, energy and industrials, all sensitive to price moves in the dollar, are downside leaders today. This is a change from the trend, since these three sectors have been the market leaders this month and since the Feb. 11 bottom.
Perhaps more importantly, the dollar index has been up four days in a row. It has now retraced 60 percent of the loss it saw in the days immediately following the FOMC meeting, when the dollar index dropped a stunning 2.3 percent in two days.
What happened? It's possible the Fed has seen the market reaction and become alarmed by the complacency. It's true, the probabilities for even a June rate hike—let alone April--declined dramatically in the face of the Fed meeting.
That may have alarmed the Fed, and so some members may feel the need to keep the markets more alert.