- Panicky investors
dumped risk assets wholesale this week as fears about Spain and the very weak
May US payrolls report destroyed confidence. Markets shifted their worried gaze
from Greece to Spain and its troubled financial sector. Late last Friday the
Spanish government promised Bankia a €19B bailout, although early on in the
week sources indicated that Madrid would need an additional €30B on top of that
to save its entire banking system. Meanwhile, the government scrambled to come
up with a mechanism to shore up the deteriorating fiscal position of its
heavily indebted regions. There were various rumors that the (still unfunded)
ESM would be used to recapitalize banks and that the IMF was developing a plan
to aid Spain, although the Germans shot down the former and the IMF denied the
latter. With yields on Spanish debt as high as 6.6%, it was unclear how Spain
could afford to fund a bailout without international aid. There were moments of
risk-on activity following reports that China would launch a massive new
stimulus plan, however Beijing warned that any additional spending would be
limited and highly targeted, dimming hopes. Then on Friday, the US May payrolls
data missed expectations by more than half, adding a mere 69K to the non-farm
payrolls and 82K to private payrolls, while the unemployment rate ticked higher
to 8.2%. There was very little to be said to explain away the terrible showing,
although analysts noted that May is seasonally the worst month for payrolls and
pointed to the 642K increase in citizens participating in the workforce, which
the BLS said was the biggest rise in five years. In addition to this data, a
round of dire manufacturing PMI reports out of Europe and a five-month low in
the China manufacturing PMI data only intensified fears about global growth.
All of these indicators of slowing global growth knocked oil prices down
another 7.9%, its fifth consecutive weekly loss. Meanwhile gold ripped higher
after Friday's payroll disappointment, rising 3.7% in one day to its highest
point in three weeks. European equities were a major casualty this week, with
Germany's DAX Index dropping 5.5% and the CAC down approx 4.25%. Major US
equity markets closed below their 200 day moving averages on Friday, and the
DJIA went negative on the year dropping 2.7% on the week, while the S&P500
fell 3% and the Nasdaq declined 3.2%.
- Nowhere was the aggressive flight to safety more evident than the flows seen in global bond markets. Investors sent yields careening to new lifetime lows in the 10-year bonds of the United States, the UK, Canada and Germany. The yield on the US benchmark 10 year is now below 1.5%, at the lowest level in over 100 years, while the yield on the 10-year gilt is said to be at the lowest levels since the foundation of the Bank of England 300 years ago. The yield on the 10-year bund appears on its way towards 1%. The yield on the two-year German Shatz yield went negative for the first time ever as curves continue to compress. The US two/ten-year spread has now narrowed below 125 basis points. With funds gushing into sovereign safe havens, large Wall Street firms have held talks over concerns about declining levels of liquidity in the corporate bond market, while analysts wondered what would happen if sovereigns further crowded out investment in corporates. Data from Lipper showed that the Barclays junk bond ETF (JNK) had record outflows in the week ended May 16th, while in the week ended May 30th, junk-bond funds had outflows of $382M. Bond buying plus discouraging data strongly suggest that another round of coordinated stimulus action is in the offing and major investment banks now suggest the launch of QE3 could come as soon as the Fed's June meeting. However, with rates ultralow and money cheaper than ever, many wonder what could be accomplished by another round of easing except to prove that global central banks are out of ammunition.
- The May same-store sales numbers were pretty good, with notable strength among apparel names. The numbers seemed to disprove a common thesis that the unseasonably warm weather in Q1 would steal retail strength from Q2. Discount chains TJX, Steinmart and Ross Stores saw especially strong comps, widely beating consensus expectations. The major department store names were more in line with analysts' projections, with one notable exception - Kohl's saw a big slide in its comps. Executives didn't give any good explanation for the decline, but did warn that they now expect Q2 SSS to be modestly negative.
- EUR/USD began the week consolidating within the range established late last week with 1.2500 as the floor and 1.2630 the ceiling in the pair. The direction of the euro hinged on the trend in the Spanish 10-year yield, which hit 2012 highs above 6.60%, just shy of its all-time high of 6.80%. Recall that the 7.0% level in yields is widely seen as the point where government borrowing costs become unsustainable, and was the level at which Portugal, Greece and Ireland were forced to seek bailouts. EUR/USD proceeded to hit fresh two-year lows throughout the course of the week, dropping briefly to 1.2290 after the poor US payrolls report on Friday. Expect the key psychological level of 1.20 to be tested over the coming weeks.
- The yen exhibited strength throughout the week. Japanese Finance Ministry officials reiterated that they were closely watching for currency volatility stemming from the chaos in Europe and warned that rapid gains in the value of the yen were counterproductive. USD/JPY saw all of its post-February gains evaporate as it approached the 78.00 level. Some dealers pondered whether the ministry would authorize the Bank of Japan to resume currency interventions (last performed back on Oct 31st, 2011). EUR/JPY hit 12-year lows below 96.20 level.
- Late in the week dealers were watching the 1.5370 support line in GBP/USD, a key level that dated back to the early stages of the financial crisis in January 2009. A sustained break of the level on Friday ignited pound sell stop orders and the level gave way pretty easily. The pair tested four-month lows below 1.5290 ahead of the US payrolls report, however dollar weakness attendant to the data prevented further declines in sterling. Analysts noted that the BoE might extend QE next week if PMI manufacturing data is weak enough.
- Whispers of China preparing another fiscal injection have grown more audible, as May manufacturing PMI echoed a downturn evident in other parts of the world. The official manufacturing print was barely in expansion at a 5-month low of 50.4, well below the 52.0 consensus and falling for the first time in 6 months. The HSBC final May PMI figure was just as troublesome, remaining in contraction for the 7th consecutive month at 48.4 while also indicating that conditions deteriorated further in the 2nd half of the month from the flash print of 48.7. Data from regional commodity-sensitive Australia was just as disappointing, as retail sales fell at the fastest pace in 11 months while building approvals saw a near double-digit sequential decline. S&P/ASX is bumping along its 6-month low while AUD/USD briefly fell below the $0.96 handle, its lowest level since early October.
- Nowhere was the aggressive flight to safety more evident than the flows seen in global bond markets. Investors sent yields careening to new lifetime lows in the 10-year bonds of the United States, the UK, Canada and Germany. The yield on the US benchmark 10 year is now below 1.5%, at the lowest level in over 100 years, while the yield on the 10-year gilt is said to be at the lowest levels since the foundation of the Bank of England 300 years ago. The yield on the 10-year bund appears on its way towards 1%. The yield on the two-year German Shatz yield went negative for the first time ever as curves continue to compress. The US two/ten-year spread has now narrowed below 125 basis points. With funds gushing into sovereign safe havens, large Wall Street firms have held talks over concerns about declining levels of liquidity in the corporate bond market, while analysts wondered what would happen if sovereigns further crowded out investment in corporates. Data from Lipper showed that the Barclays junk bond ETF (JNK) had record outflows in the week ended May 16th, while in the week ended May 30th, junk-bond funds had outflows of $382M. Bond buying plus discouraging data strongly suggest that another round of coordinated stimulus action is in the offing and major investment banks now suggest the launch of QE3 could come as soon as the Fed's June meeting. However, with rates ultralow and money cheaper than ever, many wonder what could be accomplished by another round of easing except to prove that global central banks are out of ammunition.
- The May same-store sales numbers were pretty good, with notable strength among apparel names. The numbers seemed to disprove a common thesis that the unseasonably warm weather in Q1 would steal retail strength from Q2. Discount chains TJX, Steinmart and Ross Stores saw especially strong comps, widely beating consensus expectations. The major department store names were more in line with analysts' projections, with one notable exception - Kohl's saw a big slide in its comps. Executives didn't give any good explanation for the decline, but did warn that they now expect Q2 SSS to be modestly negative.
- EUR/USD began the week consolidating within the range established late last week with 1.2500 as the floor and 1.2630 the ceiling in the pair. The direction of the euro hinged on the trend in the Spanish 10-year yield, which hit 2012 highs above 6.60%, just shy of its all-time high of 6.80%. Recall that the 7.0% level in yields is widely seen as the point where government borrowing costs become unsustainable, and was the level at which Portugal, Greece and Ireland were forced to seek bailouts. EUR/USD proceeded to hit fresh two-year lows throughout the course of the week, dropping briefly to 1.2290 after the poor US payrolls report on Friday. Expect the key psychological level of 1.20 to be tested over the coming weeks.
- The yen exhibited strength throughout the week. Japanese Finance Ministry officials reiterated that they were closely watching for currency volatility stemming from the chaos in Europe and warned that rapid gains in the value of the yen were counterproductive. USD/JPY saw all of its post-February gains evaporate as it approached the 78.00 level. Some dealers pondered whether the ministry would authorize the Bank of Japan to resume currency interventions (last performed back on Oct 31st, 2011). EUR/JPY hit 12-year lows below 96.20 level.
- Late in the week dealers were watching the 1.5370 support line in GBP/USD, a key level that dated back to the early stages of the financial crisis in January 2009. A sustained break of the level on Friday ignited pound sell stop orders and the level gave way pretty easily. The pair tested four-month lows below 1.5290 ahead of the US payrolls report, however dollar weakness attendant to the data prevented further declines in sterling. Analysts noted that the BoE might extend QE next week if PMI manufacturing data is weak enough.
- Whispers of China preparing another fiscal injection have grown more audible, as May manufacturing PMI echoed a downturn evident in other parts of the world. The official manufacturing print was barely in expansion at a 5-month low of 50.4, well below the 52.0 consensus and falling for the first time in 6 months. The HSBC final May PMI figure was just as troublesome, remaining in contraction for the 7th consecutive month at 48.4 while also indicating that conditions deteriorated further in the 2nd half of the month from the flash print of 48.7. Data from regional commodity-sensitive Australia was just as disappointing, as retail sales fell at the fastest pace in 11 months while building approvals saw a near double-digit sequential decline. S&P/ASX is bumping along its 6-month low while AUD/USD briefly fell below the $0.96 handle, its lowest level since early October.
