A dovish tone in the Federal Reserve’s policy announcement spurred an afternoon rally in U.S. equity markets yesterday. Today, investors are left to consider risk factors outside the sphere of central bank policy. Chief among the concerns for U.S. equity and corporate debt markets is the potential collateral damage presented by low oil prices, as indebted producers face cash flow that makes servicing their obligations more difficult. In the near term, most analysts anticipate that prices of crude will remain range-bound into the second quarter, as a sharp overhang in global supply means prices for immediate delivery would remain significantly lower than later-date contract costs. If this proves to be the case, many producers will continue to feel the pinch. So the good news is that Federal Open Market Committee policymakers are adopting a significantly slower rate path. Yet much of the data behind the committee’s thinking is driven by low inflation — which is itself a derivative of inexpensive oil.
Energy company files for bankruptcy protection. Fort Worth, Texas–based oil and natural gas producer Quicksilver Resources filed for Chapter 11 reorganization yesterday with $2.4 billion in debt and $1.2 billion in assets. Although this outcome was widely expected for the company, it brings up concerns over the balance sheets of speculative-grade producers during the slump in oil prices. Some analysts estimate that energy company issuers share of the noninvestment grade U.S. debt market, exceeds 15 percent while many major banks have recently indicated that they anticipate losses in the energy sector on private loans.
Budget release in the U.K. Chancellor George Osborne yesterday unveiled the U.K.’s new budget yesterday. Primary points of note include an increase in the threshold for income taxation to £11,000 ($16,400) and projections of 2.5 percent GDP for 2015 and 2.3 percent for 2016. The budget also includes a modest increase in bank levies but a significant cut in taxes on oil revenues, in move meant to aid North Sea producers hit by low prices.
U.S. jobless claims up slightly. In the U.S., initial jobless claims are an investor focus after Federal Reserve chair Janet Yellen stressed that the Federal Reserve is anxious to see further improvement in labor markets. After a dramatic plunge last week, first-time claims for unemployment benefits were up the week ended March 14 to a seasonally adjusted 291,000.
Nike to announce earnings. Beaverton, Oregon–based footwear and apparel giant Nike will announce fiscal third-quarter results after equity markets close in New York. Most analyst anticipate an 11th consecutive positive earnings report, with consensus projections of $0.85 per share. Some analysts are downbeat, however. Among those not as bullish on Nike include Canaccord Genuity. This week, the Vancouver–based financial services company issued a research report on Nike with lowered estimates for today’s release on the back of currency fluctuations and sluggish demand in Europe, despite solid overall sales.
Jana Partners takes in outside capital. Reports yesterday confirmed that Jana Partners, an activist hedge fund firm with roughly $11 billion in assets, has sold a 20 percent stake to Neuberger Berman’s private equity unit Dyal Capital Partners.
Portfolio Perspective: The Case for Caution — Q&A with Myles Clouston, Nasdaq Advisory Services
Institutional Investor: Obviously U.S. equity markets rallied in reaction to yesterday’s Fed announcement, how significant an indicator is that for long-term sentiment?
Myles Clouston: It’s true that, overall, markets reacted positively. There was no surprise with the removal of “patience” from the script, but there were surprises in the tempered outlook on inflation, due in part to oil prices and the hope there will be stronger wage growth and labor participation. The tone was more dovish than had been expected and the market responded in a favorable manner, knowing the Fed has more flexibility.
Although we had a good day, U.S. stock markets for the year are largely mixed to flat, keeping in mind the bull market we are experiencing. Since the assumption remains that rates will go up in the near to mid-term and the U.S. dollar continues to stay strong, investors are likely to weigh their opportunities as they consider what will play out with the global macro issues that have been causing some near-term dislocations.
So what are investors considering? What are the primary factors that they have to work through?
Clouston: First, cheap oil is a mixed blessing for U.S. stocks. Clearly it helps the consumer and that is a tremendous catalyst. It also supports a strong dollar that could support the trade deficit while at the same time, is also creating an even more deflationary environment in Europe to encourage the European Central Bank to press ahead. We are already seeing capital flows leaving for European equity markets. Yellen and the other policymakers at the Federal Reserve have stated repeatedly that they do not expect the cost of oil to remain in this low a range for a prolonged time but for now, it helps support the case for caution.
Myles Clouston is senior director of Nasdaq Advisory Services in New York.
