Friday, August 17, 2012

Market Week Wrap-Up

Slow-motion Summer Melt-Up Continues

Markets this week still appear to be in the grip of expectations that central banks will ride to the rescue when necessary. Yet US data out this week was largely positive, making the likelihood of more Fed QE in the near term increasingly remote. Regional manufacturing reports published by the New York Fed and the Philadelphia Fed showed significant declines in factory output, however, housing, retail sales, and jobs data all showed improvement. In the weekly jobless claims report the four-week average for new claims fell to its lowest level since March and the second lowest level since April 2008. The July advance retail sales drifted up to a five-month high, with broadly better demand across all sectors. The August NAHB index of builders' confidence in the market for new homes rose to its highest level since early 2007 and the July housing starts and building permits numbers were very good, with the latter rising to the best level in four years. Friday saw the Michigan consumer sentiment and leading indicators come in ahead of consensus expectations. The less dovish wing of the Fed board sounded off this week ahead of the upcoming Fed symposium in Jackson Hole coming up at the end of August (the exact date is still TBA). Fed regional presidents Kocherlakota and Fisher (both hawkish non-voters) took the opportunity to underline their opposition to more easing measures, while the more moderate Kansas City Fed President Ester George stated that consumers and businesses should not expect more interest rate cuts or stimulus from the Fed. Not all that surprisingly US Treasury yields continued to back up as investor risk appetite remained buoyed by rising stock prices and thin summer volumes. The benchmark US 10-year yield pushed above 1.80% for the first time since May mirroring the new multi-month highs seen in stock indices. September WTI crude has also pushed out to levels not seen since early summer, above the 200-day EMA, despite resurfacing discussions of a potential oil release from the SPR as prices move higher. For the week the DJIA gained 0.5%, the Nasdaq rose 1.8%, and the S&P500 tacked on 0.9%, ending near four year highs. The VIX volatility index closed at its lowest level in five years.

Outside of the US, preliminary Q2 GDP data out of Japan, Germany, and the overall euro zone gave cause for real concern. Japan's preliminary Q2 GDP at 1.4% missed expectations by nearly a full percentage point. Germany maintained its tepid growth rate at a mere +0.5% y/y, while the overall euro zone saw a -0.4% y/y GDP print. But the "Draghi put" overcame any negative data as German Chancellor Merkel returned from vacation to give verbal support for ECB chief Draghi, saying that his London speech pledging to do whatever is necessary to defend the EMU was in line with what European leaders have been saying for a long time.

The euro gained against its major pairs on various unconfirmed reports that officials were making preparations for a big bond buying program to support Spain, pending a formal request from Madrid for help. Bund prices were under pressure for much of the week while peripheral spreads narrowed. Good buying was seen at the short end of the Spanish curve in particular on the hopes of a potential targeted bond buying program. The Bund yield briefly topped 1.6% before finishing the week around 1.5%. Similar to the US market action, the money that is leaving the relative safety of German government debt is finding its way into stocks. European bourses are trading at or near 4 to 5 month highs and the German Dax finished the week above 7,000 for the first time since March.

Earnings season continues to wind down with a handful of retailers and tech companies releasing results this week. Cisco delivered solid results and cautiously optimistic guidance, but really delivered what shareholders were clamoring for by announcing a 75% dividend increase. Notably Cisco said the dividend increase will not force it to contend with repatriation issues-CEO Chambers said all dividend payments can comfortably be covered with US cash flow. Semiconductor equipment manufacturer Applied Materials disclosed a big y/y revenue decline in Q3 and guided an even bigger slide in revenue in Q4. The firm's business in China is sinking fast, and executives said that a review of the entire business was underway with "everything on the table." Shares of Groupon gave up 40% of their value post earnings after the firm's Q2 revenue fell short of consensus expectations. Facebook shares dipped below $20/shr to test all-time lows on Thursday after 271M shares became eligible for sale after the end of the firm's first post-IPO lockup period. Apple on the other hand reached another new all-time high as enthusiasm builds ahead of the next iPhone launch in September.

Shares of Deere sank midweek after the company's Q2 earnings missed the consensus estimate by a wide margin. Deere's profits were up 11% on a y/y basis, although that growth rate disappointed investors. Overall revenue met expectations, although the key equipment sales metric came in at +16% vs. Deere's own May forecast for +25%. The firm has lowered its forecasts for the full year and warned that more adverse weather is the greatest risk to its outlook.

Big retail chains Wal-Mart and Target reported Q2 revenue totals that fell a bit short of consensus estimates and very moderate comp store growth. TJX and Saks both met expectations on solid same store growth in Q2. Home Depot had a very good second quarter, reflecting an improving housing market, although executives warned that comps would be tough in Q3 due to the positive sales impact of Hurricane Irene last year. Apparel name Abercrombie & Fitch saw another huge decline in comps in its Q2 and missed revenue expectations. Earnings were a bit higher than expected, although profit fell more than 50% on a y/y basis. Limited Brands met expectations in its Q2 on very good comps, although its Q3 guidance was notably weak. Gap and Ann Taylor surged on Friday following strong results and guidance, but the fickle nature of specialty retail trends was evident as Aeropostale's Q3 guidance pushed the stock down more than 10%.

In 13D filings out midweek, US hedge funds disclosed big decreases of stakes in the leading US banks. George Soros completely exited his position in Citigroup, JP Morgan, and Goldman Sachs. Pershing Square's Bill Ackman significantly decreased his stake in Citigroup, reducing it from 26.1M shares to 1.1M shares. John Paulson decreased his share in JP Morgan to 4M from 18.5M shares in Q1.

Foreign exchange price action reflected the summer doldrums with volatility almost non-existent throughout the week. EUR/USD held well within the August trading range of 1.2170-1.2440 and stayed pinned near 1.23. The focus in the currency markets has increasingly shifted to the weakness in Japanese yen, as USD/JPY pair tracked rising US treasury yields to a 1-month high above ¥79.50 while sending the Nikkei225 index to a 3-month high above 9,150. The first estimate of Japan's Q2 GDP pointed to continued slowdown, as q/q mark of 0.3% undershot the 0.6% consensus. Private consumption component - some 60% of the total - was particularly telling, expanding at a 5-quarter low of 0.1% vs 1.2% increase in Q1. Furthermore, the Q2 figure was supported by a 1.7% increase in public investment that was largely underpinned by the tsunami rebuild and will eventually dissipate, suggesting a further slowdown is likely. Bank of Japan minutes for July reiterated the central bank is committed to pursuing powerful easing to achieve its 1% inflation target. The Japan cabinet office showed some optimism over the prognosis for inflation, estimating its FY13 nominal GDP at 1.9% exceeding the real GDP target of 1.7% for the first time in 16 years. Analysts further noted that the USD/JPY pair had the technical momentum to potentially retest the June highs around ¥80.60. Yen bears also cheered the appointment of Tatsuo Yamasaki, one of the architects of currency interventions in the early 2000s, to Japan's Ministry of Finance (MOF) International Bureau.