Friday, July 12, 2013

Market Week Wrap-up  Weekly Market Update: S&P500 at Record Highs as Fed Again Promises Low Rates

- US equity indices pushed out to fresh all-time highs this week despite another flare-up in the euro zone crisis and signs of trouble in China. The June China trade data and comments out of Beijing raised concerns that the Chinese economy will see further deceleration. Analysts and talking heads puzzled over apparent contradictions between the minutes of the June FOMC meeting and comments by Fed Chairman Bernanke, however there seem to be more signs that markets are starting to get the message that short-term rates will stay low for a long time even after QE asset purchases end. The June quarter earnings season began with solid results out of Alcoa, Yum Brands, JPMorgan and Wells Fargo. In Europe, political turmoil in Italy and Portugal plus sovereign downgrades of France and Italy suggest that the crisis is nowhere near being over. For the week, the Dow gained 2.1%, the S&P added 2.9% and NASDAQ gained 3.5%.

- The Fed minutes asserted that about half of FOMC officials, including the non-voting members, preferred to end QE asset purchases by the end of 2013. However later the same day, Chairman Bernanke reasserted the more dovish case, reiterating that highly accommodative monetary policy will be needed for the foreseeable future, and adding that its likely rates won't be raised for some time even after we reach the 6.5% unemployment threshold. He also suggested that the June 19th clarification of the QE timeline, indicating tapering could start this year and conclude in mid-2014, may have helped avoid future volatility in financial markets. The apparent contradiction between the minutes and Bernanke's remarks led some observers to conclude that there is no consensus on the FOMC when to begin tapering, though the baseline expectation remains that it will begin in September if the economy stays on track.

- China's surprisingly soft June trade data suggested that more economic deceleration is in store for Beijing. While the total trade surplus was not far from consensus, June exports fell for the first time in 17 months, declining by -3.1% versus expectations for a 3.7% gain, while imports fell 0.7%, a bit more than consensus. The weak imports reflect the government-engineered liquidity crunch in the month of June and the weak exports are partially attributable to the government cleaning up crooked accounting by many companies, but also weak US and European demand and the stronger yuan. China reports Q2 GDP next Monday, with the consensus at +1.8% q/q and 7.5% y/y, but some analysts expect a weaker number. New Chinese Finance Minister Lou Jiwei commented that the slowdown in China is necessary for economic transition and said it won't be a big problem if Chinese growth slips to 7.0% or lower.

- The surge in crude prices continued this week. Front-month WTI crude topped out above $107 on Thursday, the highest level seen since early 2011. Analysts suggest that the higher prices were due to supply issues, the Egypt premium and the weaker dollar. On the supply side, new pipelines have helped unclog the longstanding bottleneck at Cushing, OK. Very strong refinery utilization plus the weaker dollar have driven strong export demand for US crude from shale. The WTI-Brent spread shrank to as low as $2 late in the week. Oil majors including Conoco, Chevron, and Exxon are up around 4% on the week, while shares of refiners struggled after Valero guided Q2 result below estimates due to thin margins.

- Pershing Square Capital's Bill Ackman told investors this week that he was looking to raise $1 billion to fund a new special purpose vehicle (SPV) to invest in a large US company, like prior efforts with Sears and Burger King. Speculation about the SPV's target company fixed on FedEx and ADT Corp. Shares of both firms gained approximately 6% a piece on Tuesday on the speculation, though FedEx paired the gains on Friday after UPS warned Q2 results would be below expectations, citing freight industry overcapacity and customers shifting toward cheaper shipping alternatives.

- Alcoa rang in the June quarter earnings season with a mixed report. The firm met expectations and maintained its FY13 aluminum demand forecast, but analysts wondered how it would continue its cost-cutting program and also grow shipment volumes in the face of weak prices and flagging demand. Yum Brands also broadly met expectations and said the big slide in its China business after the chicken supply scandal is healing slowly, with China comps down 10% in the month of June versus the 19% y/y slide in May. JPMorgan and Wells Fargo gave markets their first look at the financial sector's performance in Q2 and the picture was pretty solid. Both firms met expectations, with solid y/y growth in Wells' mortgage originations and JPM's investment banking revenues.

- Microsoft unveiled its much-anticipated corporate restructuring plans on Thursday. CEO Balmer said the effort would refocus the company on devices and software services, and hopefully streamline the entire firm in an effort to speed the process of bringing new products to market. Analysts were not terribly impressed, pointing out that many units would see financial reporting amalgamated into larger entities - possibly hiding massive sustained losses at various groups, most notably the online unit.

- Political crises in Portugal and Italy limited the euro's bounce higher this week. The Italian governing coalition veered toward the rocks: the rightist PdL party - one half of the coalition government - called for a three-day suspension of parliamentary work due to the fast-tracking of party leader Berslusconi's tax fraud trial. The trial is set to begin on July 30th and a guilty verdict would strip him of political power and put him under house arrest. On Tuesday, S&P cut Italy's sovereign rating by one notch to BBB and lowered its Italy 2013 GDP forecast to -1.9% from -1.4%, sparking rumors of imminent sovereign downgrades for France and Spain. On Friday, Fitch, the last of the big three ratings agencies to rate France AAA, downgraded the French rating to AA+.

- In Portugal, President Cavaco Silva continued to broker negotiations between the parties in the governing coalition, and by the end of the week the parties gave assurances that a new coalition arrangement is in sight. Recall that last week, Finance Minister Gaspar stepped down due to collapsing support for his austerity measures and was replaced with Maria Luis Albuquerque, prompting the CDS party to threaten to pull its support for the government. This Friday, the Troika delayed its eighth review of Portugal's bailout progress, raising concerns that the country's political problems could delay a full return to the bond markets and increase the risk of a debt restructuring. Yields on 10-year Portugal government debt pushed out to 7.75%, just shy of the recent high of 8% but well below the crisis high of 11%.

- The big post-June FOMC, post-payrolls surge in the dollar topped out this week. EUR/USD dipped below 1.2760 on Tuesday as the squabbling the eurozone continued, but then lurched five big figures on Wednesday to test above 1.3200 as the perception of incoherence at the Fed undercut dollar strength. Dealers said that China was the biggest buyer of the euro on the upswing, helping to supercharge the move up. By Friday concerns over China's growth outlook and renewed concerns over Portugal's ruling coalition pushed the EUR/USD back towards 1.30

- GBP/USD probed multi-month lows below 1.4850 early on this week after May industrial and manufacturing data came in much worse than analysts' expectations. Dealers commented that the market was caught long by the poor production data as traders waited for more signs of an economic recovery. Sterling was saved by Bernanke's speech, which sent GBP/USD up to test 1.5200 and handed the pair its first w/w gain in a month. The aussie currency briefly tested below 0.9000 level for the first time since Aug 2010 on concerns about China's growth outlook.