Friday, May 31, 2013

Market Week Wrap-up  Weekly Market Update: Selling in May and heading away?

- The DJIA saw its sixth straight month of positive gains in May and the S&P500 grew for a seventh straight month, its longest winning streak since 2009. However the continued surge in markets occurred in the first half of the month, with the latter two weeks seeing declines in equity indices. The Nikkei225 had another volatile week, and fell more than 5% on Thursday as jittery investors dumped shares on the back of a stronger yen, just a week after a 7.3% dive that comprised steepest single-session decline since the tsunami two years ago. Japan's big gambit and Fed tapering continue to loom large over markets, and another round of decent US data underlined US economic strength. The S&P/Case Shiller report showed that home prices jumped y/y by the highest amount in eight years in March and the May Chicago PMI index saw its strongest reading in more than a year. Note however that the second reading of Q1 GDP revised the headline figure down to +2.4% from +2.5%, reflecting downward adjustments to inventories and government spending, and next week's May jobs reading will trump all. Tonight the China May manufacturing PMI report may enter contraction, as was the HSBC flash May manufacturing PMI report earlier this week. For the week, the DJIA fell 1.2%, the S&P500 1.1% and Nasdaq 0.1%.

- Besides the wild moves in the Nikkei, the yen did not manage to weaken further this week. After trading as high as 103 last week, USD/JPY crept lower and closed out the week well into the 100 handle. The pair saw a brief reach toward 102 midweek, but strengthening trend in the yen was the rule. Yields on the 10-year JGB peaked around 0.965%, near a 13-month high of 1 percent seen last week. Yields came off, but it left investors wondering how the BoJ will keep down bond yields while simultaneously driving inflation higher. Note there was some progress on the inflation front, as the May Tokyo CPI data saw its first positive increase since June 2011.

- Talk about the long-heralded rotation out of fixed income gained traction this week as US treasuries sold off and yields spiked higher. Early in the week the 10-year yield broke out of the range seen over the last eight months, trading above 2.1%. Late on Tuesday, yields pushed out to 13-month highs with the benchmark 10-year yield trading as high as 2.235% and yield on the 30-year bond rising as high as 3.280%. The gain over the course of trading on Tuesday was the biggest one-session increase since late 2011.

- Emerging markets are taking a beating from rising bond yields, the strong dollar and the wind-down of the commodity cycle. Traders are watching trade in the MXN, BRL and ZAR as the talk of tighter Fed policy begins to draw funds away from the strongest emerging markets. Emerging market equity funds this week saw their largest weekly outflows - $2.9 billion or 0.3% of AUM - in 18 months, and emerging market debt funds saw their first weekly outflows in a year.

- OPEC agreed to maintain its 30M bpd production quota at its conference in Vienna today. The organization confirmed that it has no official price target for crude and reiterated that it was closely watching market action. OPEC also said it would expand capacity to combat volatility and study whether shale oil is sustainable over the long term.

- The media fixated on the largest bid by a Chinese firm for a US company to date: ag giant Shuanghui International reached an agreement to acquire pork producer Smithfield Foods for $4.7 billion in cash. The deal is sure to be highly controversial: Shuanghui has plenty of ties to the Chinese government and the deal faces review by the U.S. Committee on Foreign Investment (CFIUS). Investors should recall the Nexen deal in Canada that played out with a great deal of drama over the course of last year, although CNOOC managed to pull it off in the end. In other deal news, Berkshire Hathaway reached a deal to acquire Nevada utility NV Energy for $10 billion in cash.

- The euro traded in a broad range this week but closed out only slightly higher at 1.2970 versus the dollar than where it came into the week, around 1.2920. EUR/USD suffered a downdraft on Tuesday from risk appetite, but the Japan pension news and a very positive eurozone consumer confidence reading saw the pair move up to trade briefly around 1.3060 on Thursday. Two European employment reports offered yet another assessment of the perilous state of the continent's economy: the eurozone April unemployment rate rose to 12.2%, a record high, while German May unemployment levels rose slightly for the third consecutive month. There was recurring talk among traders that the ECB had reassessed the economic situation and would not likely do negative deposit rates at the upcoming meeting.