Friday, June 28, 2013

Market Week Wrap-up  Weekly Market Update: Fed Officials Clarify Bernanke, PBoC Eases Liquidity Crunch

- The global sell-off sparked by the China liquidity crunch and Fed Chairman Bernanke's remarks on June 19th was brought to heel this week. The bond sell-off reached its peak on Monday before retracing some ground, while equity indices in Asia, Europe and the US posted solid gains through the middle of the week. Not every asset class bounced back, however, as gold continued its plunge, dipping below $1,200 by Friday. In the US, a parade of Fed officials sought to reign in panicky investors and emphasize that Bernanke did not substantially alter Fed strategy last week. China's leadership seemed to blink in its attempt to cool off the massively over-leveraged banking sector by cutting off liquidity, which went a long way to calming markets. With the exception of the third and final reading of Q1 GDP and the Chicago PMI, the US economic data out this week was pretty strong. First quarter GDP data in Europe was not very good, although the UK managed to avoid a triple-dip recession. The second quarter drew to a close on Friday with solid gains for equity markets despite the recent turmoil, giving the S&P500 its best H1 in fifteen years. For the week, the DJIA was up 0.7%, the S&P500 gained 0.8%, and the Nasdaq added 1.4%.

- No fewer than eight top Fed officials spoke this week in an effort to explain and clarify the words of Fed Chairman Bernanke at the post-FOMC decision press conference on June 19th. The overall tone was to admonish markets for misunderstanding the chairman's message and to emphasize that while tapering of asset purchases will likely begin soon, interest rates were a separate issue and would remain low for the foreseeable future. Hawk Lacker warned that markets had gotten ahead of themselves in their response to the taper. The officials acknowledged that Bernanke did make adjustments to strategy with the mention of the 7% unemployment milestone for tapering; the New York Fed's Dudley said asset purchases would most likely end around a 7% unemployment rate, while Kocherlakota said the jobless rate would likely hit 7% in second half of 2014. Fed's Powel averred that the FOMC would not even think about interest rates until unemployment hit the 6.5% threshold.

- The surge in bond yields that began in early May and accelerated after Bernanke's June 19th press conference appears to have topped out for the moment. The yield on the US 10-year hit a nearly two-year high of 2.66% on Monday, but has backed off this level to trade as low as 2.48%. Analysts note that other bond markets have been even more volatile. For instance the Barclays US Corporate High Yield Index briefly topped 7% early in the week - up from 5% on May 8th. In the week ended June 26, investors pulled $23B from bond funds, including emerging markets, high yield, investment grade and MBS funds, comprising the largest weekly outflows (as a percentage of AUM) since late 2008.

- After fixed income, precious metals have been the other main victim of the volatile reorientation of markets over recent weeks. Spot gold dipped below $1,200 this week for the first time since the summer of 2010. The second quarter was gold's worst quarter since at least the 1920s, losing 23% in three months. Gold entered a bear market in April, and since then it has only retreated further from its all-time high of $1,921 in September 2011. Gold miners have been hit hard with the decline in the yellow metal. After steep losses since early May, Barrick Gold dropped another 10% this week.

- The Chinese liquidity crisis appears to be easing just as quickly as it appeared. Last week the PBoC said it would not inject funds in order to ease liquidity conditions as overnight borrowing rates (Shibor) shot up as high as 13.4%. On Monday it said it remained extremely reluctant to step in and smooth over the liquidity crunch even as the Shanghai Composite fell more than 5% and a gaggle of Chinese firms and institutions cancelled bond auctions due to market conditions. By mid-week the PBoC appeared to have reversed course and stated that it would inject funds into selected lenders to ease conditions. Shibor dropped to around 5.5% as of Thrusday.

- The Commerce Department revised its third and final reading of Q1 US GDP downwards to +1.8% from the +2.4% second reading last month. The surprise downward revision was primarily related to consumer spending, exports and commercial real estate. Personal consumption growth was revised down to 2.6% from 3.4%. The Chicago PMI reading on Friday was also a disappointment, falling back to 51.6, making the prior month's one-year-high reading of 58.7 seem like an aberration. Other US economic data was pretty good. The May Durable Goods headline gain of 3.6% matched the revised April gain of 3.6%, while the various subcomponents of the report all exceeded expectations. The May New Home Sales numbers beat expectations and rose to their highest level since July 2008, marking the third straight month of gains in new home sales, while the April S&P/CS survey showed sustained gains for home prices as supply continues to tighten. Meanwhile, June Consumer Confidence rose to its best level since January 2008.

- BlackBerry severely disappointed investors with its Q1 report on Friday. Hopes were high for a resurgence led by BB10 sales although none was forthcoming. The firm saw a small loss in the quarter versus expectations for a profit, and it warned the same would be the case in Q2. It shipped 2.7M BB10 handsets in the quarter (~40% of overall shipments in the quarter), undershooting expectations.

- In M&A news, hospital operator Tenet Healthcare said it would buy rival Vanguard Health Systems for about $1.73B plus the assumption of $2.5B in debt. The $21 per share offer represented a 70% premium to last Friday's close. Shares of JetBlue spiked up as much as 8% on Friday on a sketchy report in the Brazilian press that Brazil airline Azul - run by JetBlue founder David Neeleman - was planning to buy JetBlue and possibly Portugal's TAP as well. The reports were subsequently denied.

- The dollar stayed strong through most of the week thanks to rising yields and widening interest rate differentials, overseas repatriation flows and unwinding of carry-related trades. EUR/USD closed out the month of June more or less where it began, hovering around support at 1.3000 after having trade as high as 1.3400 mid-month. The Euro only managed a slight boost from EU finance ministers' agreement on rules for bail-ins and EU leaders' presenting a seven-year budget and an €8B youth employment package. The yen extended the reversal seen last week as the ruling LDP swept Tokyo assembly election over the weekend, and was further supported by a 6% surge in the Nikkei225 on Thursday and Friday. The Tokyo poll results indicate strong momentum for Abe's party ahead of the House of Councilors (upper house) election in July.