Market Week Wrap-Ip

- After the EU summit, policy action from three central banks and the US June employment report, global markets are feeling shaken and disjointed. The Fourth of July holiday week began with a moderate risk-on rally that followed in the wake of the EU leaders meeting last week. At that time, EU officials agreed to a €120B growth pact and tentatively authorized the use of ESM and EFSF funds for bank recapitalization. Early this week investor confidence managed to overcome the anemic final June PMI manufacturing and services readings out of Europe, denials from skeptical northern European officials who warned that bailout funds could not in fact be used to fund banks or buy debt, and the first sub-50 reading in the US ISM manufacturing series since 2009. Sentiment appeared to be fixed on the idea that the ECB would deliver another round of stimulative policy at its June meeting to compliment the initiatives announced at the EU summit. Thursday brought the scheduled ECB and BoE decisions, plus a surprise PBoC rate cut. However confidence was shaken when the ECB took the half measure of cutting rates but refraining from offering any new programs, crushing risk assets, the euro and commodities. Then on Friday, the US June non-farm payroll number missed expectations, coming in only a few thousand higher than May's 77K gain, while the unemployment rate remained stuck at 8.2%. Spot gold had jumped approximately $80 and WTI crude had climbed $10 to above $88 in the week leading up to the ECB decision, but both had given up much of these gains by the Friday close. Yields on Spanish 10-year debt popped back above 7% red line on Friday, while the yield on the 10-year UST fell below 1.55% and the yield on the 10-year Bund dropped below 1.33%. For the week the DJIA fell 0.8%, the S&P500 dropped 0.6% and the Nasdaq eked out a gain of less than 0.1%.

- The three central bank decisions on Thursday certainly had the feel of coordinated action, but ECB President Draghi stated at the post-decision press conference that there had been no coordination among central banks beyond the "normal exchanges of views." The PBoC upstaged the BoE, cutting interest rates moments before the scheduled BoE decision. The Chinese also gave domestic banks more leeway to set lending rates in an attempt to stimulate credit creation. The BoE increased its asset purchase target by £50B to £375B and kept rates on hold, as expected. The ECB trimmed borrowing costs by a quarter of a point to a new record low of 0.75% and cut the deposit rate to 0%. Anticipating criticism about the lack of more easing programs, Draghi reiterated that more time was needed to see how the two existing three-year LTROs unfold, and also warned that the impact of the LTROs on euro zone nations had been uneven.

- The third quarter of 2012 began this Monday and the June quarter earnings season starts with Alcoa's earnings report next Monday. The lead-up to earnings season has not been promising, with a broad selection of firms slashing guidance in the face of flagging economic growth in the US, Europe and Asia. Just this week tech firms including Seagate and Informa, and retailer Kohl's all trimmed guidance for the quarter. Overall the picture for this earning season is not good. Analysts say scant EPS growth is anticipated, and one reputable news agency projected that Q2 earnings for S&P 500 members are expected to decline by around 1.1 percent compared with the same quarter of 2011.

- The strong same-store sales numbers seen earlier this year are only a memory now after June comps data confirmed unseasonably warm weather in Q1 sapped sales from the Spring months. Department store names had a terrible June, with Macy's, Kohl's and Bon-Ton all lagging estimates, while Costco and Target were each a bit below par. Drug store chain Walgreen saw a steep 10% decline in comps. High-end department names Nordstroms and Saks did well, easily topping market consensus views. Discount retailers continued to shine as TJX and Ross Stores beat expectations by wide margins again. Apparel retailers were mostly disappointing with The Gap, Buckle, Cato, Wet Seal and Stein Mart disclosing negative or flat comps, well below consensus expectations.

- The mild rally early in the week did not help the euro in the least. EUR/USD saw its highest level of the week late on Sunday, at 1.2670, and then declined sharply through Friday afternoon. The steepest decline in the single currency came after the disappointing ECB policy announcement, with EUR/USD plummeting one and a half big figures in a matter of minutes. Many FX analysts blamed the sell-off that followed the decision on the absence of supportive ECB policy moves (no LTRO, no peripheral bond concessions) rather than the rate cut. One analyst said that the ECB has simply added back the risk premium that the EU summit had sliced off last week. Others commented that Draghi was merely amplifying his often repeated message to euro zone politicians that governments need to step in and do more to finally extinguish the crisis.

The People's Bank of China surprised the markets just hours before the anticipated policy moves from the ECB and BOE on Thursday, firing off another round of easing via a cut in its 1-year lending and deposit rates. In contrast to its earlier step just four weeks ago when PBoC cut both rates by 25 basis points, this week's move was asymmetrical with a 25bp cut to deposit rate and 31bp cut to lending rate, taking the benchmark levels to 3.00% and 6.00% respectively, effective July 6th. The increasingly aggressive central bank action came on the heels of continued deterioration in manufacturing data, as the latest official PMI figures released over the weekend showed a 7-month low of 50.2, while the new export orders component fell into sub-50 contraction for the first time since January. Over in Australia, the RBA stood pat for the first time in 3 months at 3.50%, adding the recent round of easing has been "material" but also remaining at odds with the level of AUD exchange rate. Australia's economic data as of May further supported RBA reluctance to cut further, as retail sales, trade, and building permits figures all came in well above expectations. The regional focus now shifts to Sunday evening and the expected release of China CPI, followed by other monthly economic data out of the mainland and a rate decision in Japan later in the week.

TradeTheNews