The week commenced
with investors eagerly anticipating two key events, the EU summit and a Supreme
Court ruling on healthcare. Both had surprising outcomes. On Thursday the US
top court upheld the constitutionality of the individual mandate, the backbone
of President Obama's Affordable Care Act. The ruling provided a lot of
political fodder for Washington, while overall market sentiment softened upon
its release. With that out of the way, attention turned squarely back to Europe
as the month and quarter end drew near. On Monday, Spain submitted its formal
request for bank sector aid, and then European officials turned their attention
to setting details of a growth pact to compliment the fiscal compact. Leading
up to the opening of EU summit, expectations were being tamped down,
particularly by German officials, who repeatedly vowed their staunch opposition
to the notion of mutual liability, most notably to Eurobonds and deposit
insurance. Late into the summit's first day President Van Rompuy confirmed that
leaders had agreed on a growth agenda valued at €120B, or 1% of EU GDP. The
surprise turn came later that night when EU leaders agreed to direct the
firewall funds of the EFSF and ESM toward direct recapitalization of banks,
reversing the German stance against it. Additionally and more importantly,
countries not currently involved in bailout programs (Spain & Italy) will
be allowed to access funds, and any ESM loans made to Spanish banks will not
have creditor seniority. The potential for a break in the cycle of ever higher
borrowing rates across Europe really goosed sentiment. European peripheral
yields plummeted and the US 10-year yield moved below that of the German Bund
for the first time since early February.
Investors aggressively piled into risk trades, and even some backtracking by
German Chancellor Merkel had little effect after she reminded everyone that the
ESM bank recapitalization plan would need unanimous approval and aid from the
EFSF/ESM will always have certain conditions and could take up to one year.
After trading below $80 for much of the week, crude futures rocketed up over 9%
on Friday, and gold simultaneously gained over 3%, ending the week near $1600.
The EUR/USD surged two big figures briefly approaching 1.27. Thanks to the huge
rally on Friday stocks were up this week: the DJIA gained 1.9%, the S&P500
rose 2% and the Nasdaq added 1.5%, making it the best June for stocks since
1999.
The US Supreme court decision on Thursday held that the mandate at the center
of President Obama's healthcare overhaul is constitutional as a tax (but not as
a 'penalty' as it was framed by the Obama Administration). Chief Justice
Roberts joined the left wing of the court to uphold the mandate, not based on
the Commerce Clause but on the basis that Congress has the authority to set
taxes. The court also ruled to limit Medicaid expansion but did not invalidate it.
This decision was a real stunner as almost no one expected the law to be upheld
in this manner. Almost every lower court rejected the tax argument and the key
to almost every decision was the Commerce Clause. Republicans quickly
reiterated calls to repeal the law and healthcare insurance industry groups
said that major provisions (premium tax) in the healthcare reform law will have
unintended consequences including cost increases. Some also argued that the law
being upheld will inflame partisanship, making it harder to get a budget deal
done heading into next year's fiscal cliff. Congress demonstrated some ability
to compromise this week, however, passing the $120B highway transportation and
student loan bill in both chambers on Friday.
Several drug names were in the news prior to the Obamacare ruling. Arena
Pharma's lorcaserin weight loss pill was approved by the FDA for obese adults
(i.e. body mass index of 30 or greater). The company will be required to
conduct post marketing studies but because it was the first weight loss drug
approved in more than a decade it brought buyers into the entire sector. Teva
opened the week with surge after receiving a favorable court ruling in its
copaxone patent infringement litigation with Momenta Pharma. The decision covers
several patents, the last of which expires on September 1, 2015. Shares of
Bristol-Myers and Pfizer moved lower after receiving a complete response letter
from the FDA on the application for its eliquis stroke prevention drug,
requesting additional information on data management and verification from the
Aristotle trial.
Though it took a back seat to Europe and Obama care, the US housing market
quietly had a good week. The data continues to point to a potential bottom as
sentiment is beginning to brighten. Monday's May new homes sales registered a
25-month high while month's supply figures dropping to levels not seen since
late 2005. The April S&P/CaseShiller house price survey showed the smallest
y/y decline since Dec 2008. Also May pending home sales registered a 6-month
high. After the data, the chief economist at the NAR commented that if housing
starts do not rise in a meaningful way over the next two years due to the
difficulty in getting construction loans, and barring an unexpected shift in the
economy, the steady shedding of inventory could lead to shortages where home
prices could get bid up close to 10 percent in 2013. Among the homebuilders,
Lennar reported strong results that beat on the bottom line while coming up
short of analyst revenue estimates. New home orders rose 40% though with
average selling prices climbing and the cancellation rate dropping which has
provided a boost for the sector.
Thursday's initial jobless claims were roughly in line with analyst
expectations but remained elevated at 386K, further dampening the prospects for
a recovery in the monthly payrolls data next week. The data followed a
disappointing Q4 earnings report from Paychex, which cuts its FY13 revenue
forecast. The payroll, human resource, and benefits outsourcing solutions
provider is often viewed as a good barometer of the employment landscape.
Anheuser-Busch confirmed the purchase of the remaining stake in Groupo Modelo
shares this week. The $20.1B deal represented roughly at 30% premium bringing
the estimated total enterprise value north of $32B. The transaction is expected
to close during Q1 2013 and financing has been fully committed.
Throughout the week cracks to the global economic growth story emerged. In
their quarterly report the Brazilian central bank cut its 2012 growth forecast
to 2.5% from 3.5%. German economic data was generally softer culminating in
Friday's disappointing decline in May retail sales figures. Prior to that
several large German companies provided commentary indicating they were not
immune to Europe's woes. Chip maker Infineon guided Q3 revenues to be
"slightly" lower on a sequential basis due to current global economic
uncertainties. Siemens CFO said he expected some difficulty in meeting the
lower end of its earnings guidance range due to slowdown in China and continued
European uncertainty. Salzgitter also revealed it no longer expects to be able
to achieve breakeven results for its steel unit this year which weighed on the
entire group. By Friday, North American multinational corporations had joined
the chorus. Nike shares plunged more than 10% after Q4 results were shy of
consensus expectations on weaker margins, while Research in Motion fell nearly
20% as its Q1 Blackberry shipments plunged.
For much of the week the EUR/USD pair hovered in the lower end of its
established range from mid-June, with the 1.2450 support seen as pivotal. The
higher yields in the Spanish and Italian auctions coupled with weak Italian
retail sales offset any benefits of a potential EU fiscal union deal at the
upcoming summit. Growth remained a concern for Europe. The German engine showed
signs of sputtering while peripherals faced renewed headwinds, exemplified by
the Bank of Spain comment that its Q2 GDP contraction would be worse that Q1.
Softer inflation data in Europe and weaker German employment figures boosted
expectations for an ECB rate cut next week. Analysts are now calling for a
25-50bps cut in the main refi rate from its current historic low level of
1.00%. By Friday the EUR/USD pair exhibited it biggest one day gain in eight
months following the EU announcement of its roadmap towards further
integration. The EUR/USD moved off its Asian lows of 1.2433 and approached 1.27
by mid-morning before consolidating its gains throughout the European morning.
The USD/JPY currency pair maintained a firm tone despite the Japanese Lower
House passing a national sales tax hike legislation and May inflation data
disappointing expectations. While PM Noda had succeeded in pushing through his
consumption tax increase proposal, the victory in the Diet may have political
repercussions for his own party. Former DPJ leader Ozawa is expected to decide
as early as Monday on whether he and some 50 of his supporters would bolt the
DPJ in opposition to the legislation. Although the initial estimates suggest
the number of departing lawmakers would be below the 54 threshold required for
DPJ to maintain its lower house majority, the fracture may leave the ruling
party in a far more vulnerable state. Meanwhile, Japan May core CPI data
returned to deflationary territory, falling into negative territory for the
first time in 4 months and potentially signaling yet another increase in the
Bank of Japan asset purchase facility at its next meeting on July 12th. The
concerns over Europe and cross currency flows caused the JPY to benefit from
risk aversion throughout much of the week. But risk was back on during Friday's
European session following Day one of the EU Leader Summit. The USD and JPY
currencies were weaker against the European and commodity-related pairs.
Over in China, May industrial profits saw its third consecutive month of
decline at -2.4% y/y, as attention shifts to the weekend release of the
official manufacturing PMI data. Recall the HSBC flash PMI last week shocked to
the downside, falling to a 7-month low 48.1. While the official PMI figures
have stayed above the 50 threshold until now, analyst consensus appears to be
on the side of a contraction this time - the first below-50 print since
November of 2011.
