Friday, June 15, 2012

Market Week Wrap-up

Market Week Wrap-up: All Eyes on Athens

- The imminent Greek parliamentary elections have unsettled markets for weeks and at this point there is no clear view of how the event will impact markets in the days and weeks to come. Last weekend Europe offered Spain up to €100B to recapitalize its banks with almost no demands for policy changes and Spain accepted the deal on a preliminary basis. China reported a mixed bag of May data over the weekend as well, with much better than expected trade figures but slightly weaker industrial production and retail sales. Equity markets were forced lower early on in the week as peripheral yields spiked higher post-Spain bailout; the Spanish 10-year yield crept higher all week and briefly tested above 7% on Thursday, with Italian yields not far behind. Analysts warned that the bailout was in reality merely an attempt to buoy Spain's banks ahead of the uncertain Greek elections on Sunday. Press reports citing anonymous officials suggested that G7 and/or G20 central banks were preparing coordinated action contingency plans to cope with any fallout from the Greek poll, and there were some unilateral efforts undertaken by individual banks. The Bank of England and the UK government took their own steps to prepare the British banking system for more turmoil by activating the Extended Collateral Term Repo (ECTR) lending facility, which was set up late last year. The scheme will inject an estimated £80B into banks over time. Russia cut its FX swap rate to ensure liquidity. Weak data in the US was taken as potential cover for the Fed to take some new stimulus action next week at the FOMC meeting. The headline May retail sales data showed contraction for the second consecutive month, the preliminary University of Michigan consumer sentiment index tumbled to its lowest point this year, and the May Industrial Production reading was negative. The DJIA gained 1.7% on the week, while the S&P500 added 1.3% and the Nasdaq gained 0.5%.

- The Greek elections finally arrive this Sunday: voting will take place between 7am to 7pm local time (midnight to 12 noon ET). Exit polls will be released as soon as polls close, with official results expected around 14:30ET. The Greek government bans the publication of polls for the final two weeks before the election, and the last sanctioned poll in early June showed the two leading contenders, pro-bailout New Democracy and stridently anti-bailout Syriza in a dead heat. There was chatter all this week about unpublished polling research favoring one side or the other, however a reputable Greek pollster was quoted as saying that Greek political parties were leaking numbers on purpose to boost their standing. For its part, Syriza reiterated that Greece must remain in the euro zone while also promising to demand a renegotiation of the bailout conditions, especially in light of the very easy treatment of Spain. Syriza leader Tsipras insisted that his party would not form a unity government or coalition government with pro-bailout parties. German officials countered these comments repeatedly, insisting that if Greece wished to remain in the euro zone it would have to respect all prior bailout conditions as they were. German press sources asserted that if the terms of the bailout were renegotiated, Greece would need a third bailout to cover the funding gap created by a longer period of austerity and structural realignment. Bundesbank President Weidmann said that allowing Greece more time to reduce its deficit would actually be harmful for the euro zone.

- The second quarter earnings season begins in a month or so, and preliminary guidance and profit warnings came down the wires all week. Semi name Texas Instruments narrowed its guidance range for Q2 in its mid-quarter update, keeping it more or less in line with consensus expectations. On the call, TI said that orders are trending well in the quarter, with the US market showing the most strength. Agrium said its Q2 earnings would be at the high end of its prior guidance range, putting them well above analysts' average. Agrium executives said the firm was seeing excellent results, with higher prices for fertilizer, higher margins and overall good market conditions. Scotts Miracle-Gro warned that it would fall short of its prior FY12 guidance as demand for its potting soil and plant seeds failed to take off during the peak season, as sales grew 3% YTD, down from +8% growth seen coming into the month of May. Steel name Nucor Corp warned that earnings in Q2 would be considerably lower than consensus estimates. The company blamed a surge in imports of cheap sheet steel and rebar for pressuring already-weak prices.

- Nokia launched a huge corporate overhaul, saying that it will close plants in Canada and Germany, plus its only remaining plant in Finland, with around 10,000 job cuts, totaling approximately 7% of its workforce. In addition, Nokia warned that margins in the handset business would be even worse than expected as sales of its new Lumina handset disappoint. Analysts suggested that Nokia was at the edge of collapse, causing major headaches for Microsoft which has made Nokia's handsets the core of its push to revive its smartphone business. Microsoft scheduled a "surprise" event for next Monday, where it promised a "major" announcement. Tech blogs, citing sources, said that the company is expected to unveil its own tablet computer offering.

- Several reports out this week offered color on the US housing market. RealtyTrac foreclosure activity report showed that foreclosure activity in May rose 9% over April levels, and the distinct "foreclosure starts" metric rose on a y/y basis for the first time in 27 months. Analysts say the sudden bump up in foreclosures is the long heralded flood that follows the resolution of banking industry's robo-signing scandal (and the freeze in foreclosures that accompanied it). RealtyTrac said that while many of the new foreclosure starts will likely end up as short sales or auction sales rather than repossessions, the new rush could "threaten to destabilize the market once again." An earlier report out of Corelogic indicated that April shadow inventory levels had fallen 14.8% y/y, though the flow of new seriously delinquent loans into the shadow inventory has been approximately offset by an equal volume of distressed sales.

- Coming into the week, EUR/USD tested above $1.2665 after euro zone leaders agreed to loan Spain €100B to recapitalize its banks. However the cross gave up all its post-bailout announcement gains over the course of the day on Monday. Dealers blamed the euro's swoon on skepticism of the deal for Spain aided by the SNB selling off euros accumulated in its defense of the EUR/CHF floor. EUR/USD made a few stabs below 1.2450, however the cross was firmly back above 1.2620 by Thursday afternoon. All in all, EUR/USD remained contained within its June trading range of 1.2300 to 1.2630 until late Friday when it broke out to a three week high.

- The Swiss Franc was steady after the SNB offered no surprises in its quarterly rate decision. SNB chief Jordan reiterated that CHF currency was too high even at the imposed 1.2000 floor and said that the bank would not exit the EUR/CHF floor policy any time soon. A taskforce including members of the Swiss government and the SNB was established to evaluate options to protect Switzerland from the euro zone crisis, although no concrete goals for the group were disclosed.

- Economic data out of China released over the weekend was mixed, as slowing inflation figures outweighed better than expected bank lending and trade prints for the increasingly more dovish PBoC. May CPI came in at a 2-year low of just 3.0% y/y, below 3.2% consensus, while PPI contracted at the quickest pace since late 2009. Industrial production was also 2 ticks below consensus at 9.6% but up from last month's multi-year low of 9.3%. Trade data was surprisingly positive as exports and imports turned in double-digit y/y gains, supporting commentary out of China state officials that the slowdown would be contained to the first half of the year. May new loans was also up over 10% above consensus at CNY793B, potentially keeping bank lending on target for CNY8.0-8.5T in 2012 - a range that was speculated to be unachievable just a month ago. Later in the week, China's NDRC researcher indicated the PBoC would continue to act on its new easing bias, cutting lending rates 2 more times and RRR 3 more times before the end of the year. Shanghai Composite ended the week up 1% above 2,300, right in the middle of its 2012 300-point range.

- A couple of central bank rate decisions in the Asia Pacific went as expected this week, albeit with a tinge of less than anticipated dovishness that briefly benefitted their respective currencies. Reserve Bank of New Zealand remained on hold at 2.50% for the 10th consecutive meeting, adding that the economic outlook has weakened and households remain cautious. RBNZ said little that would suggest it may bend to minority calls for additional easing, setting a target of 2.7% for its 90-day bill rate until June 2013. In Japan, the BOJ also kept its powder dry ahead of the Greek elections this weekend, leaving its asset purchase fund unchanged at ¥70T. The BOJ did upgrade its economic assessment for the first time since March, pointing to resiliency of domestic demand and improvement in exports. USD/JPY pair fell to a 1-week low below the ¥79 handle following the BOJ decision. AUD/USD regained parity following press reports that the German Bundesbank might start diversifying some of its reserves into the Aussy currency.