The low-volume equity rally continued apace through Tuesday morning as the S&P500 pushed out to a four-year peak of 1426 and the DJIA equaled its four-year high from early May. However, equities reversed course as markets digested more evidence of weakness in Europe and Asia, and weighed the chances of more Fed easing, more Chinese easing and ECB peripheral bond purchases in the face of swarming economic troubles. On Wednesday, analysts strained to read the tealeaves in the FOMC minutes, with the key phrase suggesting that the Fed would be willing to ease further unless data pointed to a "substantial and sustainable" improvement in data. St. Louis Fed President Bullard made the hawkish case, saying the FOMC minutes were "purposefully vague" to preserve flexibility, but that it would not be appropriate for the Fed to take "gigantic action" if the economy continues to muddle through. The specter of China's slowing economy was raised by the very weak August HSBC flash manufacturing PMI: the export-orders component dropped to a level last seen during the Lehman crisis while the inventories component rose at the fastest pace since the survey began in April 2004. The US July durable goods data painted a mixed picture: despite the strong headline number, the core capital goods orders were much weaker than expected at -3.4%. All the talk of more easing in the US, Europe, and Asia sent precious metals higher. US Comex gold futures shot 3.3% higher this week after breaking the 200-day moving average on Tuesday and silver futures rose nearly 8.5% on the week. For the week the DJIA fell 0.9%, the Nasdaq dropped 0.2%, and the S&P500 slipped 0.5%.
- Issues surrounding aid for Greece and Spain pushed European indices off of their best levels since early April. Coming into the week, there were more press reports that Spain was preparing to request aid from the euro zone bailout funds, which would presumably trigger imminent ECB bond buying. Accompanying these reports were various educated guesses about how the ECB would manage the program, with some sources suggesting that the bank could establish maximum spreads between peripheral debt and bunds, or it could establish "secret" (undisclosed) yield caps. Both Spanish and European officials denied the reports, and analysts pointed out that no formal decision on bailout expected before September 12 at the earliest, when the German Constitutional Court is scheduled to rule on Germany's participation in the ESM bailout fund. Extreme volatility was apparent in Spanish government bond markets late in the week.
- Greek PM Samaras met with EU Commission officials and the Germans this week to plead his case for a two-year extension of his nation's austerity program. The Germans were not sympathetic, and German Finance Minister Schaeuble aptly pointed out that more time was no solution to Greece's predicament and would only require more money. EU Commissioner Juncker was more neutral, noting that no decision on more Greek aid would be made before October, when the latest Troika report will have been finalized. Investors were spooked by various comments from German officials late in the week that they were mulling a plan for Greece to "temporarily" exit the euro zone.
- Quarterly reports from Hewlett-Packard and Dell were very poor. Both firms more or less met diminished expectations, although revenues for either company were down y/y on weak sales. Executives from both firms warned that global tech spending was weakening faster than anticipated, with PC sales weak due to aggressive pricing by competitors and customers holding back ahead of new product releases. Homebuilder Toll Brothers hit a real home run with its Q3 report, crushing both top- and bottom-line expectations. Profits were up sharply on a y/y basis as new contracts signed rose by more than half. Shares of retailers Big Lots and Loews both fell sharply after very weak reports, while Best Buy suspended both share buybacks and its prior FY13 guidance thanks to sharply lower profits. Barnes and Noble and American Eagle Outfitters both surprised to the upside.
- BHP Billiton delayed a $20B expansion of its Olympic Dam copper mine (among the largest copper mines on earth) and warned that no other major projects would be approved this FY, after reporting a big decline in Q2 profit and its first decrease in annual profit in three years. Many saw the development as a warning for the entire commodities sector, while Australian Resource Minister Ferguson said the nation's resource boom is over - although other Australian officials immediately disputed this assertion.
- In M&A news, Aetna said it would buy Coventry Health Care for about $5.7B in cash and stock at a 20% premium to Coventry's closing price in the prior session. The deal is only the latest move to consolidate large insurers as they position themselves to cope with the demands of Obamacare (Recall that last month Wellpoint agreed to acquire Amerigroup for $4.9B to boost its strength in the Medicaid arena). Talks between Best Buy and founder Richard Schulze on taking the company private broke down after the board said Schulze had rejected its offer to conduct due diligence. Schulze said he was surprised by the board's abrupt termination of discussions after weekend talks and had expected to conclude an arrangement early in the week.
- In FX trading, the euro made solid headway, with EUR/USD pushing out to seven-week highs firmly above 1.2500 on Friday. Note that in the prior week, the pair's price volatility had fallen to its lowest in five years. Among the positive catalysts were reports about more possible Chinese stimulus spending plus the very dovish FOMC minutes, comments by Bullard notwithstanding. The greenback hit two- or three-month lows against most European currencies thanks to the FOMC minutes raising expectations for QE3 in September. EUR/USD encountered headwinds on Friday after key meetings between German and Greek leaders and a Spanish Cabinet press conference failed to provide any clarity on the European situation, as well as the report about a temporary Greek exit, although analysts believe the latter was a trial balloon designed to gauge the market's reaction to different scenarios. EUR/USD remained above the pivotal 1.2440 level as the week came to a close.
- The slowdown in China continued to haunt the Far East region, as weaker than expected HSBC manufacturing data for August helped send Shanghai Composite index to its 3-year low below 2,100. Flash PMI for August came in at a 9-month low of 47.8, down from the final 49.3 print in July, while also remaining below the expansion threshold of 50 for the 10th consecutive month. PBoC Governor Zhou reiterated all policy options are on the table, keeping investors on edge for another potential weekend easing. The Chinese central bank last cut its 1-year benchmark rates in early July, but stepped up its liquidity operations via reverse repos this week, presumably abstaining from another rate cut because of renewed upside pressure in the housing market. The malaise in mainland China was felt further in Australia, where the resources minister went as far as calling the national mining boom to be over. RBA Governor Stevens attempted to backtrack from that sentiment in his address to the parliamentary economics committee, noting the peak of resource investment boom is still some 1-2 years away, while also offering little in terms of expectations for another easing in the near term. Nonetheless, AUD was among the weakest currencies on the week, falling below $1.04 for the first time in a month against the greenback and also reaching a 6-week low against the euro and the kiwi dollar.
- In Japan, July trade figures revealed a similarly disappointing outlook, as exports to China fell about 12% on the year and shipments to Europe posted its biggest drop in nearly 3 years at -25.1%. USD/JPY came off its 1-month highs of ¥79.65 on chatter of Japanese exporter orders to sell USD above the ¥80 level. Dovish FOMC minutes and the subsequent USD weakness further helped send the pair below the 79.00, while local press speculated that Japanese government is preparing to cut its monthly economic assessment for the first time in 10 months.
