- Markets were
relatively subdued this week, characterized by light trading volumes. The
European front was mostly quiet, with plenty of speculation about the nature
and timing of renewed ECB bond buying. It is assumed that Spain will be the
first euro zone nation to request help in holding down bond yields from the
EFSF/ESM, although Spanish PM Rajoy was reluctant to make any commentary about
his government's plans. China released a raft of July data that further
intensified worries about its slowing economy: industrial output fell to +9.2%,
the weakest growth rate since early 2010, while exports contracted for the
fourth month in a row, up a mere 1% y/y. Germany disclosed that June industrial
production declined slightly on a y/y basis (the figure was flat in May) while
June factory orders were sharply lower on a y/y basis, raising concerns about
Europe's growth engine. There was little consequential economic data published
in the US besides the June trade data, which showed that the trade deficit fell
to its lowest levels since the end of 2010, thanks mostly to low oil prices.
Interestingly, McDonalds failed to report positive global monthly same store
sales for the first time since early 2003. Fed governors have been quiet this
week and markets are looking forward to the Jackson Hole conference at the end
of August for more color on the potential for more QE. Fed dove Rosengren the
FOMC must act to aid the economy, proposing a new round of mortgage bond
purchases to drive rates even lower. Without all that much to pin it on risk
sentiment was impressive throughout the week. Crude oil and US Treasury yields
reached their highest levels in more than 2-months with the Sep WTI contract
briefly approaching $95. The S&P cash market moved through 1400 and VIX
fell below 15 for the first time since late March, while in Europe the Euro
Stoxx 600 reached 5-month highs. For the week the DJIA rose 0.8%, the
S&P500 gained 1.1%, and the Nasdaq was up 1.8%.
- Earnings season is winding down with another mixed week for major names.
Priceline shares plunged over 100 points on Wednesday after issuing subpar
guidance on economic uncertainty in Europe, which accounts for more than half
of the firms travel bookings. Graphics chip maker Nvidia exceeded quarterly
expectations by a healthy margin and issued above consensus guidance, though
management echoed other semiconductor makers in noting expectations of 28mm
wafer supply constraints continuing through Q3. Express Scripts was another
winner this week with shares rising after beating estimates handily on
improving margins and raising FY expectations. CVS said that it would continue
to benefit from the Express Scripts/Walgreen spat by retaining new business in
the second half of the year. Chesapeake surged after telling investors that it
would significantly boost its FY13 production, even as it continues with asset
disposals.
- Department stores that reported results all ended the week trading higher,
though by different means. Macys and Nordstrom announced solid Q2 results and
both raised FY guidance. JC Penney shares initially plunged after a big
earnings miss on Friday, but rebounded as CEO Ron Johnson charmed analysts with
a fuller description of his store concept retooling and noting that back to
school sales are perking up. Kohls was one exception, with shares dropping
after the firm cut is FY12 outlook and offered soft guidance for Q3.
- The euro was soft for the bulk of the week as talk about a bailout for Spain
encouraged investors to sell off the single currency. EUR/USD bounced off the
1.2450 level early in the week, with option barriers providing resistance. By
Friday EUR/USD was down to the 1.2290 neighborhood. Spanish PM Rajoy has held
two press conferences since last Thursday's ECB meeting and in both cases he
would not decisively exclude the possibility of asking for EU aid. He did say
that his government was waiting for more details on the ECB's bond plans before
making any final decisions. The spread between the Spanish 2-year and 10-year
government bonds widened out to record levels around 320bps, given that Draghi
was clear that the focus of new bond buying would be on the short end of the
curve. EU's Juncker did comment that a Greece exit from EMU would be manageable
but carried enormous risks but such an event was not likely until the end of
autumn.
- The pound began the week on a somewhat softer footing on reports that the BOE
was expected to sharply downgrade its growth and inflation forecasts as part of
its quarterly inflation report, scheduled to be published on Wednesday. The
report was not as dovish as expected, although it did cut 2012 growth to +1.0%
from +1.25% prior, better than expectations for the figure to be revised to
0.0%. GBP/USD firmed above 1.5640 level after BOE Gov King said a rate cut
would harm some institutions while not significantly changing the economic
outlook.
- USD/JPY could not muster the effort to break out of the 78 range. The yen was
firmer ahead of the BOJ rate decision on Thursday. The chances of intervention
to cap the yen appeared to be rising as analyst speculated that both the BOJ
and Japanese government are not quite ready to take steps to boost the economy.
Dealers warned that the potential for fund repatriation by Japanese
institutional investors might also weigh on the USD the near term. August
typically sees large bond redemptions in the US, ahead of Japan's fiscal
half-year end in September.
- July economic data out of China was hardly indicative of a soft landing,
raising concerns that Q2 GDP may not mark the bottom in the mainland slowdown
after all. Industrial production rose just 9.2% y/y, which was the slowest pace
in over three years and well below expectation of 9.7% increase. Likewise,
retail sales growth of 13.1% y/y was a multi-year low, suggesting the progress
toward a more consumption oriented economy remains painfully slow. Trade and
lending data were also well below estimates - trade surplus of $25.1B was the
first m/m decline in 5 months amid disappointing low single digit rise in
imports and exports, while new loans saw a 10-month low of CNY540B, well below
CNY700B consensus. Markets will certainly be on a heightened state of alert for
additional easing by the PBoC this weekend after this latest round of
disappointing results and continued decline in the consumer inflation, with
July CPI also falling to its lowest level since early 2010.
- Down under, Reserve Bank of Australia remained on hold at 3.50% for the
second consecutive meeting, noting the economy is yet to see the full impact of
its prior cuts. RBA also acknowledged China economy has softened but deemed it
reaching a more "sustainable pace", anticipating little further
slowdown. Later in the week, RBA quarterly policy statement raised its 2012 GDP
target from 3.0% to 3.5% and lowered the full-year CPI target from 2.5% to
2.25%. AUD/USD briefly tested 4-month highs above $1.06 before succumbing to
soft China trade data and testing below the $1.05 handle early on Friday
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