Friday, June 8, 2012

Market Week Wrap-up

- It would be a stretch to say that there was much good news for the global economy this week, however there was a marked absence of straight up bad news. European nations edged closer to convincing Spain to accept a bailout for its troubled banking sector, and all week long there were headline suggesting that the announcement of a preliminary bailout deal of some sort was imminent. With Germany and the ECB flatly ruling out any direct lending to banks from euro zone bailout funds, it appears that any bailout will involve a line of credit for Madrid or its FROB bank resolution fund. On Friday, there were reports that the major players would have a conference call on Saturday, and other reports suggested some kind of arrangement could be announced before the open next Monday. Note that Spanish officials have protested that they must wait for the completion of an audit of the banking system before any concrete aid figure can be requested. The ECB held rates steady and announced no new major initiatives at the June rate decision on Wednesday. President Draghi celebrated the impact of the two three-year LTROs, asserting again that they have improved key indicators of distress and prevented a more serious credit crunch, and said there would not be another operation anytime soon. In testimony before Congress, Fed Chairman Bernanke sought to temper expectations for additional easing at the upcoming FOMC meeting. Bernanke commented that while past QE has helped bring down rates (and boost equity prices), there would be "diminishing returns" from any additional easing. China cut interest rates on Thursday in a rare mid-week decision, leaving analysts debating whether the move was designed to help bolster dire conditions in local funding markets or possibly pre-empt poor economic data. China is schedule to release a variety of May economic reports over the weekend. Both US and European equity markets recouped some or all of the steep losses seen last week, and US markets saw their biggest gains of the year. The DJIA gained 3.6% on the week, while the S&P500 added 3.7% and the Nasdaq surged 4%.

- The US homebuilders segment got a shot in the arm this week with the release of Hovnanian's stunning Q2 results. Earnings and revenue totals out of Hovnanian blew away consensus expectations, while the firm's backlog was up 48% on a y/y basis. Hovnanian's CEO said that the company sold more homes per community in April 2012, excluding a September 2007 promotional blip, than it has in any month since the spring selling season of 2006. Shares of HOV were up more than 20% on the week, while other leading homebuilders were up 5-10% a piece.

- Shares of Navistar tumbled 25% on Thursday following the firm's terrible Q2 earnings report. Navistar booked an enormous loss thanks to a raft of special items, including charges for warranty costs and some income tax valuations. Executives also explained that customers held off on purchases due to uncertainty surrounding the EPA review of its new low-emission diesel truck engines. It also slashed its FY12 outlook, warning that on the low end EPS could be zero for the year. Shares of NAV recouped all of their losses by Friday, after strategic investor Carl Icahn used the recent weakness to add to his stake which now stands at close to 12%.

- Chesapeake Energy was in focus on Friday as the troubled company met for its annual shareholder meeting. With CEO McClendon under tight scrutiny for alleged conflicts of interest and other improprieties, investors were in an ugly mood. They managed to force two board members to resign and voted against the executive compensation package. Ahead of the meeting, Chesapeake confirmed that it would sell a batch of midstream assets in three transactions valued up to $4.0B, putting it about halfway through its ongoing divestment process.

- After last week's hammering, the euro managed to regain some ground this week, although EUR/USD remained well contained within the 1.2300-1.2600 range established late last week. On Wednesday the ECB left its key interest rates unchanged and did not announce any new measures to combat the European debt crisis, but did extend the term of several temporary refi operations until January 2013. ECB Chief Draghi ruled out more three-year LTRO operations, saying he does not believe all the opportunities offered by second three-year LTRO have been fully exploited. The technical failure to move above the former January low of 1.2630 painted a bearish picture for the single currency. Dealers are watching to see whether Spain will finally cave in to pressure from Germany and request aid for its banking sector this weekend. Late in the week some euro softness was blamed on the Swiss National Bank. Switzerland's May FX reserve data illustrated the determination of the Swiss National Bank to defend the EUR/CHF floor at 1.2000: reserves rose by approximately CHF65B, to a total of CHF304B. Unsubstantiated rumors claimed that the SNB might be legging out of a portion of the euros it has accumulated from its defense of the EUR/CHF floor at 1.2000.

- The People's Bank of China accelerated its monetary easing efforts on Thursday, cutting the one-year lending and deposit rates by 25 bps apiece, to 6.31% and 3.25%, respectively. Though widely speculated by analysts and fixed income market observers who were quick to point to a suspicious CNY20B repo operation on Thursday, the easing did provide a risk-on jolt across asset classes, briefly sending AUD/USD to parity and copper prices to their best levels of the week, above $3.40. Investors are still grappling with what extent the PBoC move reflects deterioration of fundamentals and bank lending activity in April, as opposed to being a warning shot ahead of the release of May economic data this weekend.

- Rate decisions from central banks in Korea and Australia were largely in line with expectations. The BoK stood pat at 3.25% but acknowledged that downside risks to growth are on the rise. The RBA cut by 25bps to 3.50%, citing further moderation in China growth and cloudy economic prospects in Europe, but it was surprisingly upbeat on the domestic economy. Much better than expected employment, trade, and GDP data released later in the week corroborated the less dovish than anticipated tone out of the RBA. April trade figures saw a 4-month high, while Q1 GDP on a y/y basis was a multi-year high 4.3% against 3.3% consensus. Australia May employment saw 39K net new jobs created against expectations of no growth, as labor participation component rose sharply to a 6-month high 65.5%.