TradeTheNews.com Weekly Market Update: Rising Rates and Taper Fears Heighten Volatility
- Volatility returned to markets this week after several weeks of subdued summer trading. The miss in the Japan preliminary Q2 GDP during Monday's Asia session dampened sentiment on Monday, although better European Q2 GDP numbers and the solid July US retail sales data helped balance the picture. Then on Thursday, reports showed that initial claims for the week ending Aug 9th dropped to six-year lows and the July US CPI hit 2.0%, indicating continued progress towards the Fed's targets. The combination of good jobs and inflation data provoked a big decline in equity indices and a sell-off in USTs as traders decided the data helped cement the case for Fed tapering in September. By Friday, the 10-year yield pushed out to two-year highs above 2.84% as the sell-off in bonds continued. Spot gold made eight-week highs around $1,370, and silver rose 14% for its biggest weekly gain in nearly five years. For the week the S&P500 dropped 2.1%, the Nasdaq gave up 1.6%, and the DJIA lost 2.2%, its worst weekly decline this year.
- A return to growth in France and Germany helped pull the euro zone out of economic contraction in the second quarter. Euro zone Q2 GDP gained 0.3%, German GDP was up 0.7% and French GDP grew 0.5%, although there has been plenty of skeptical commentary from analysts about the sustainability of the trend. Goldman Sachs highlighted that Eurostat does not release a GDP breakdown by components until its second estimate of GDP (due on Sept 5th), making it difficult to assess what drove underlying growth. Second quarter GDP figures from Italy and Spain remained in contraction, at -0.2% and -0.1%, respectively.
- The rebound in gold prices over the last several weeks inspired some to say a floor has been found in the yellow metal, although others called it merely a technical move inspired by light, low-volume summer trading. In any case, there will certainly be more risk-off trading ahead of the multiple momentous events on tap for September, making safe havens potentially more attractive. In a note to clients on Thursday, JP Morgan wrote that they would "encourage shorter-term investors to consider getting long the gold space with a four to five week time horizon." The SPDR Gold Trust ETF saw the first increase in its daily holdings since June even as the biggest holder - Paulson & Co - finally announced it has squared more than half of its famous long position. Note also that the China Gold Association reported that Chinese Jan-Jun gold consumption rose to 706.36 tons, +54% y/y.
- The MBA mortgage applications for the week ending August 9th data saw its steepest decline since late June. This marks the 12th week of decline in mortgage applications out of the last 14 weeks (there was a faint +0.2% gain in the prior week). Mortgage activity has collapsed by over 50% in the last three months as the average 30-year mortgage rate has risen from around 3.50% to above 4.30% currently (with recent highs of 4.70% in early July). Meanwhile the August NAHB housing market sentiment index showed that confidence among homebuilders is at its highest level in nearly eight years, despite the rising mortgage rates.
- Retail names Walmart and Macys reported weak second quarter results and cut their FY forecasts. Both firms cited a very challenging retail environment and customer uncertainty. Walmart US comps were -0.3% while Macys' were -0.8%. Kohls was a bit better but it also cut its FY outlook. High-end retailer Nordstrom's earnings were ok, but it also cut its FY view, and comps, while still positive, decelerated from earlier in the year. In tech, Cisco reported decent fourth-quarter profits and revenue, but share fell sharply as management issued cautious Q1 guidance and announced 4,000 job cuts, citing an unusually "mixed and inconsistent" economic recovery.
- It has been more than a year since BlackBerry hired bankers to help it explore options for finding a strategic partner or licensing the BB10 operating system. This week BlackBerry announced another exploration of strategic alternatives, but this time it's likely the board is looking to sell the entire company before it is too late. Reports noted that the effort over the last year uncovered very little interest from potential bidders, although some chatter this week suggested that Microsoft and Amazon might take a closer look at BlackBerry.
- Many tech stocks dropped this week on disappointing earnings results, but some of that was offset by renewed strength in Apple shares. Apple stock rose over 10% on the week after activist investor Carl Icahn debuted on twitter with an announcement that he had built a large stake in the consumer tech giant. Icahn said he had spoken with CEO Tim Cook and urged him to increase and accelerate its share buybacks.
- After a week of strife between the board of JC Penny and activist investor Bill Ackman, news arrived on Tuesday that Ackman resigned as a director. Ackman has been pressuring the board to quickly replace interim CEO Ullman, saying that they are taking too long to make a decision on a new chief. On Friday, Ackman reached an agreement with Penney on terms for an orderly sale of his 17.7% stake in the future.
- The Department of Justice filed suit to block the merger between US Airways and American Airlines, citing anti-trust concerns. The DOJ asserted that the merger would lead to less competition and higher prices for consumers. JP Morgan said it remains cautiously optimistic that the firms can legally prevail in their efforts to merge, although the case would probably take months to resolve and could prompt American to emerge from bankruptcy without merging.
- China had a wild trading day on Friday: the Shanghai Comp spiked much as 5% before quickly returning to the flat line thanks to a trading glitch at Everbright Securities. There was more vague press talk of possible RRR cuts and targeted fiscal stimulus measures, but nothing formal was announced. Yum Brands' shares fell after the firm reported Chinese SSS losses narrowed less than many had expected in July, though Yum still reiterated that China comps would be back to growth by the fourth quarter.
- EUR/USD remained in the 1.3200-1.3400 range where it has traded for the past three weeks. The greenback was bid for most of the week thanks to higher bond yields, but even given that factor the pair remained range bound. Note that after the pretty strong August German ZEW survey, ZEW economists wrote that the ECB was gaining more scope for rate increases as the euro zone crisis dies down.
- The dissent of monetary policy committee member Weale revealed by the BoE minutes this week raised some questions about the BoE's newly minted forward guidance. Note that Weale himself stated that he supported forward guidance, but wanted a shorter horizon on the inflation threshold, given the threat of higher medium-term inflation expectations. Both UK July home prices and retail sales data were better than expected, and GBP/USD probed above the 1.5580 level to make two-month highs.
- The yen reversed some of last week's strengthening trend in the wake of the miss in the Q2 GDP data, rising from 96.50 to above 98.50 at one point. Additional upward momentum in USD/JPY came from reports that the Abe administration was considering lower corporate taxes as a counterweight to the planned sales tax hike.