- 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%.
