10 Things You Need To Know Before The Opening Bell, Wednesday, March 19, 2014

10 Things Before Opening Bell

March 19, 2014

Good morning. Here's what you need to know.

Story of the week. The Federal Open Market Committee concludes its first monetary policy meeting today under the leadership of new Federal Reserve Chairwoman Janet Yellen. The FOMC is expected to taper the monthly pace of bond purchases made under quantitative easing by another $10 billion to $55 billion and move toward more qualitative guidance on the likely future path of short-term interest rates. Observers will also be watching for changes to the FOMC's Staff Economic Projections for unemployment, inflation, and the fed funds rate. The FOMC will release a statement detailing its decision and the new projections at 2 PM ET, and Janet Yellen will hold her first FOMC press conference as Fed chairwoman at 2:30 PM.

Yuan nears the danger zone. The Chinese yuan fell to 6.1991 against the U.S. dollar in offshore trading on Wednesday, coming close to the 6.20 "danger zone" flagged by Morgan Stanley analysts as a level that could trigger a more rapid depreciation. The move follows the worst two-day loss for the yuan (on Monday and Tuesday) since December 2008, which comes in the wake of the People's Bank of China's weekend announcement that it would widen the daily trading band in which the yuan is allowed to fluctuate in onshore markets.

Markets are quiet. S&P 500 and U.S. Treasury futures are little changed from Tuesday's closing levels this morning, and the dollar is little changed against the euro and the yen. European indices are up slightly, while most Asian indices closed lower overnight, with the exception of Japan's Nikkei 225.

FedEx earnings. FedEx reported earnings of 1.23 per share in the December-February quarter, below consensus EPS estimates of $1.46. Revenue also missed expectations, coming in at $11.3 billion versus the $11.43 billion consensus estimate. “Historically severe winter weather significantly affected our third-quarter earnings,” said CEO Fred Smith. “On days when the weather was closer to normal seasonal conditions, our volumes were solid and service levels were high. The FedEx strategy of maintaining separate express and ground networks with multiple hubs proved to be an especially important advantage for our package customers during this quarter’s severe weather and peak shipping.”

Japan trade. Japan reported a trade deficit of ¥800.3 billion in February, larger than consensus forecasts for a ¥600.9 billion deficit. Imports rose 9% from a year earlier, while exports were up 9.8%. "Japan’s trade statistics have shown that the import surge caused by the rush demand before the consumption tax hike is peaking but still influencing Japan’s trade account significantly," says Osamu Takashima, a strategist at Citi.

Euro zone construction. Euro zone construction output growth accelerated to 1.5% from the previous month in January from 1.3% in December. On a work-day adjusted year-over-year basis, construction output was up 8.8% following a 0.1% year-over-year decline in December. Across the EU, the highest increases in production in construction were observed in Slovenia (+22.4%), Spain (+5.8%) and Germany (+4.4%), and the largest decreases in Romania (-4.3%), Slovakia (-3.9%) and France (-2.2%).

BoE minutes. The focus was on the recent strength in sterling and the amount of slack left in the labor market at the Bank of England's February meeting, according to minutes of the meeting released today. BoE governors concluded that sterling's strength was accounted for by the U.K.'s growth prospects relative to those elsewhere in the world, and that many of the recent job gains were of a low-productivity nature, reducing the apparent degree of capacity in the labor market.

U.K. employment. 105,000 workers found employment in the three months through January, according to the latest data from the U.K. Office for National Statistics, bringing the total employed to a new record high. The employment gain failed to meet market economists' consensus forecast for a 110,000 gain, however. The unemployment rate remained unchanged at 7.2% in January. In February, U.K. jobless claims fell by 34,600, larger than the 25,000 drop expected by economists.

U.K. budget. Chancellor of the Exchequer George Osborne will present a new budget to parliament at 7:30 AM ET. "The March budget could signal growth supportive measures while the updated OBR projections could highlight that the latest improvement in the U.K. economic fundamentals resulted in improving fiscal outlook," says Citi strategist Valentin Marinov. "The latter could increase bets on potential U.K. rating upgrade and support the pound."

Mortgage applications. The Mortgage Bankers Association said U.S. mortgage applications fell 1.2% from a week earlier in the week through March 14, following a 2.1% decline the week before. Meanwhile, MBA's indexes of refinancing activity and purchases both fell 1%.

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Below is a Q&A with Peter Tchir, founder of TF Market Advisors.

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BUSINESS INSIDER: Is there a single most important market price to be watching right now in terms of gauging the prospects for the global economy?

PETER TCHIR: We are watching China closely. In particular we are seeing signs of stress in some of the Chinese funding levels which concerns us, especially as they are experiencing their first corporate bond defaults. We don’t believe in the decoupling argument.

BI: The focus this week is on the Fed. What do you think will be the next Fed story to move markets?

PT: Think we will shift from "taper" which will continue according to the current schedule and start discussing timing of the first rate hike. This will destabilize equities and we could see signs in the FOMC projections that they release.

BI: What is the scariest thing going on in ETF land?

PT: A proliferation of small ETFs. They don’t have the diversification and are too specific. ETFs are best when they represent "beta," are liquid and provide access to the market. In fixed income, products like HYG let investors trade beta. BKLN lets investors trade the loan market which isn’t really accessible in any other way. I don’t like the small funds that are too specific.

BI: What is the most exciting trade out there right now, in your opinion?

PT: Sadly, the trades that I see as most exciting are AAA CLO bonds which are extremely cheap as investors lack the institutional knowledge to get comfortable with them. They offer the best risk/reward in income products and is one area I would like to see an ETF. AAA CLO’s pay Libor +150 compared to 5-year investment grade floating-rate bonds which are more like LIBOR +30 (which hasn’t stopped FLOT from growing to almost $4 billion).

I am scared to say this, but I like selling CDS. With Russia still an issue, I would hold off, but CDS has performed extremely well, is very liquid, at least in the CDS indices I would use. They are cleared now which helps reduce counterparty risk and transparency has increased since SEF’s have launched. We are still double the pre-crisis spread levels so there is room to get good income and possibly price appreciation. Stocks and bonds are back to pre-crisis levels. PIMCO uses them in at least one of their ETFs so it is conceivable that over time we will see some CDS-based ETFs.

Finally, I am looking at China. FXI could be interesting. We aren’t ready to pull the trigger, but this is getting reminiscent of Italy and Spain last summer, when the best potential returns were available before everyone else falls in love.

BI: Which developments in global financial markets, if any, would you flag as most concerning for risk appetite?

PT: The lack of volatility. Volatility is something that hedge funds need to thrive. Lack of volatility leads to leverage which leads to problems. We are potentially sowing the seeds of our own destruction as this extended rally, with low volatility, is creating a mentality where positions get riskier and larger, and historically that ends badly. We might have a long way to go to get the leverage back to 2007 levels, but it is something we are watching closely, and even the CLO’s that we like, are part of that growing, and troubling trend.

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