Friday, June 7, 2013

Market Week Wrap-up  Weekly Market Update: Japan Jitters Rattle Markets, US Jobs Data Restore Calm

- Global markets saw volatile trading this week as investors reacted to extreme moves in FX markets and worried about a possible June swoon. Early in the week analysts parsed conflicting official and HSBC May manufacturing PMI data out of China, while the US May ISM manufacturing survey came in at 49, its worst level since 2009 and the first reading in contraction this year. The Nikkei225 fell sharply again after Japan PM Abe laid out the third component of his plan to arrest deflation and get the Japanese economy back on track. At its lowest level on Friday, the Nikkei had fallen more than 7% peak to trough in the week; US and European markets were knocked down as well by the moves. Big moves in equity markets were complemented by volatile FX markets: the ECB held rates steady (many had expected another incremental rate cut), which strengthened the euro, which in turn pushed the yen out to its strongest level since Abe announced the first two legs of his reform strategy in early April. On Friday the US May jobs report came in better than expected, helping European and US equities erase most of their losses from earlier in the week and adding fuel to the debate on when the Fed would begin tapering asset sales. For the week, the DJIA rose 0.9%, the S&P500 gained 0.8% and Nasdaq added 0.4%. The DJIA's streak of 20 straight gains on Tuesdays was broken after traders ran the Dow up in anticipation on Monday.

- In a speech on Tuesday evening, Japan PM Abe laid out the "third arrow" of his grand economic plan. Abe's systemic reforms aim to generate 2% annual GDP growth (3% nominal growth) over next decade, up sharply from the 0.89% real annual growth (-0.46% nominal) seen over the last decade. To help achieve this ambitious goal, the government will push corporate consolidation, promote free trade, reform agriculture, boost capital inflows, and tinker with employment policy. Markets expressed immediate disappointment with the plan and the Nikkei lost 3.8% in the immediate aftermath of the speech.

- On Thursday the forex market saw the ECB hold pat on rates, helping to ignite the Japanese Yen's biggest session gain in nearly three years. There had been talk the ECB might cut rates again heading into the board meeting on Thursday, however the council held rates steady, which set off a move from 1.3110 to briefly above 1.3300 in EUR/USD. The stronger euro helped drive a 3% gain in the yen versus the dollar, as USD/JPY plummeted from 99.25 to as low as 96. Draghi's comments on the conference call held absolutely nothing new, and his attempt to talk down the euro gave the green light for some long euro trades, which were exacerbated by jitters ahead of the US jobs report.

- The US May jobs report defied predictions of disaster with a non-farm payrolls number of +175K that was better than expected and much better than Wednesday's ADP figure of +135K (April's NFP was +149K). However several other components were weaker than expected. The prior month's nonfarm payroll was revised lower, taking the three-month average for NFP to +155K, well below the Q4 2012 pace which averaged +237K/month. The unemployment rate rose a tenth of a percentage point to 7.6%, driven by an increase in labor force participation (which is itself a hopeful sign).

- President Obama is meeting with China Premier Xi Jinping today and Saturday for an intimate one-on-one summit. There are hopes the two leaders can develop a more personal connection and help begin reducing some of the suspicion on both sides of the Pacific. In a speech earlier in the week, Xi said that China can't grow in isolation, while Vice Premier Zhang commented that Beijing attached equal importance to both imports and exports. However on Friday, just ahead of the meeting between Xi and Obama, official Chinese mouthpiece Xinhua published an article asserting that the yuan is approaching equilibrium with dollar. Note that overnight, the PBoC sets the yuan mid-point at another record high versus the dollar, at 6.1620 v 6.1362 prior.

- Coming into the week, there were suspiciously diverging manufacturing PMI data out of China. The official release was 50.8 (v 50.0e), confounding analysts looking for a deterioration after the 49.6 reading in the HSBC flash PMI for the 1st half of the month. The subsequent release of the final HSBC figure showed that the 2nd half of May produced an even steeper deceleration of 49.2, the lowest reading since October 2012, with exports orders down for the second consecutive month and new orders slipping to 48.7, the first reading below 50 since September 2012. Analysts have in part attributed the divergence to large state-owned firms outpacing the smaller institutions surveyed by the HSBC. Others continued to question the accuracy of China's official economic data, withholding judgment until the industry indicators for power consumption and bank lending are released next week.

- The Financial Stability Oversight Council (FSOC) has proposed designating non-bank firms AIG, Prudential and GE Capital as systemically important financial institutions (SIFI), marking them for heightened regulatory oversight. Other companies could be named, but only three have come out to disclose it publically so far.

- US auto sales improved in May as the industry SAAR rebounded to 15.3M after slipping below 15M in April for the first time since last October. Ford and Chrysler saw another month of double-digit sales gains, up 14% and 11%, respectively. However GM saw only a 3% sales gain due to softness in fleet sales, but still slightly surpassed expectations. Note that Ford's F-series sales grew 30.6% y/y, as the housing recovery sustains robust demand among contractors.

- The EU announced that it would impose duties on imports on Chinese solar panels for six months. The EU and China have been negotiating over ways to rebalance the critical trade in solar panels as European companies complain about Chinese dumping. Analysts see the move as an effort to apply increasing pressure on China if ongoing talks drag on. For the first two months, the duties would only be around 11%, but tariffs would climb to 47% after two months if talks do not progress. The Chinese responded by slapping import duties on European wine and threatening to levy tariffs on luxury vehicles as well.