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Week in Review: Global Oil and Net Interest Rate Margins Impact Company Fundamentals

For the week ended 22 April 2016

  • Oil rallies for the week
  • The ECB holds policy rates unchanged
  • Google charged by the European Commission
  • EM nations cut interest rates

Global equities rose this week led by energy- and commodity-sensitive companies.  The Chicago Board Options Exchange Volatility Index (VIX) was reduced on the week from 14.36 to 13.95, while the yield on the 10-year US Treasury note rose from 1.75% to 1.85%. West Texas Intermediate crude prices rose to $43.39 from $39.77 a week ago, and global Brent crude prices rose to $44.53 from $41.80 as talks among oil-producing nations to cap production fell apart.

GLOBAL ECONOMIC NEWS

Oil production freeze talks go nowhere
Saudi Arabia refused to freeze oil production without Iran's participation, while Iran elected not to participate in the talks in Doha, Qatar. Both Iran and Saudi Arabia remained focused on retaining oil market share in an ongoing price war for European customers.  Meanwhile, Saudi Arabia looks to raise about $10 billion in credit to offset a budget shortfall caused by the drop in oil prices.  This week US President Barack Obama met with Saudi Arabian leadership in an effort to resolve tensions and increase the resources dedicated to the fight against the Islamic State. 

Post-January stock market rebound in China
After a difficult start to 2016, Chinese stocks trading in Shanghai have rebounded from the low on January 28 (+12%). Similarly, Chinese stock trading in Hong Kong (Hang Seng China Enterprises Index) have returned about 22% since the lows in mid-February.  Some concerns about currency stability and slower economic growth have been abated.  At the company level, the recovery is having an impact on some businesses with China exposure.  As an example, Yum Brands posted its third consecutive quarterly increase in same-store sales. 

US jobless claims fall to lowest level since 1973
New claims were only 247,000 versus a consensus of 265,000. Although this is the lowest level since 1971, the size of the labor market is much larger today than it was over 40 years ago.  The fact that employers are holding onto their employees may be a good sign for the labor market.

ECB holds key interest rates unchanged
The European Central Bank held the refinancing, marginal lending and deposit facility rates unchanged at 0.0%, 0.25% and -0.40%, respectively. ECB president Mario Draghi warned that inflation may turn negative in the coming months. 

Emerging market nations cut interest rates
Over the past few weeks, the central banks of India, Indonesia, Turkey, Taiwan and Hungary have all lowered policy interest rates in an attempt to improve slow economic growth. Additionally, Singapore's central bank eased monetary policy through its currency exchange rates.  This comes as emerging market stock indices have rallied from their lows.  Investors remain cautious of the impact that the US Federal Reserve may have on emerging market stock prices. 

Brazil moves closer to impeaching Rousseff
The lower house of Brazil's congress voted to impeach President Dilma Rousseff. Rousseff has fallen out of favor as the nation remains in recession and political strife. Impeachment proceedings will move to the Senate. 

Argentina's massive bond offering
In the largest emerging market bond offering to date, Argentina has raised $16.5 billion. Qualifying as a high yield issue, some bonds with 30 years until maturity came with a yield of up to 8%.  This milestone comes after the country defaulted on more than $80 billion in debt in 2001. 

GLOBAL CORPORATE NEWS

Alphabet Inc.'s Google charged by the European Commission
The charges are expected to focus on Google's insistence that smartphones with the Android operating system include Google applications. This integration has boosted advertising revenue for Google's mobile unit.  Android accounts for a large portion of the smartphone market in both the United States and Western Europe, 59% and 71%, respectively.  Unlike Apple and its iOS operating system, Google does not make all Android phones.  In related news, Alphabet missed earnings due to rising costs from long-term projects such as driverless cars and home automation. 

Weak Q1 results raise worries over future bank profits
Five of the largest six US banks missed their earnings target in the first quarter. In addition to lower levels of trading desk revenue, the low interest rate environment has impacted net interest rate margins. 

SunEdison's Chapter 11 filing
Once a powerhouse of the clean-energy industry, SunEdison has lost about 99% of its stock market value since last summer and owes creditors nearly $10 billion. The company continues to deal with five failed deals with a combined value of about $3.8 billion.  At least two of these deals are in the renegotiation or litigation process.

Verizon's pursuit of Yahoo
Although other suitors have dropped out, Verizon Communications pressed forward in its bid to acquire Yahoo. The combined company would allow Verizon to expand web-based video services and improve revenue from online advertising.  Yahoo's revenue dropped 18% to $859.4 million, the lowest level in the four years since CEO Marissa Mayer took over.

Amazon to offer stand-alone online streaming
A monthly subscription to Amazon's service will cost $8.99, which is lower than that offered by Netflix. So far, Amazon has offered its video service to its Prime customers.  This comes as Netflix reduced its forecast for international growth, which sent shares lower for the week.

THE WEEK AHEAD

  • US new homes sales are reported on Monday, 25 April
  • US durable goods orders are announced on Tuesday, 26 April
  • The FOMC meets on Tuesday and Wednesday, 26–27 April
  • US GDP is announced on Thursday, 28 April

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual or quarterly report. Full holdings are also available on the individual Fund Summary tab in the Products section of mfs.com.

Past performance is no guarantee of future results.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

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