Friday, August 23, 2013

Market Week Wrap-up  Weekly Market Update: August is the Cruelest Month

- The summer doldrums continued this week, featuring sluggish, low volume trading plus a brief but exciting market outage. Handicapping the Federal Reserve's exit from QE asset purchases remains a major or the major theme. After rising sharply last week, the yield on the US 10-year leveled out, trading just shy of 2.9%. Higher interest rates in the US are having an outsized impact on emerging markets, as investors pull funds and drive currencies lower against the dollar. In China, shibor benchmark rates are spiking higher again and the PBoC is weakening the yuan. In Europe, stronger preliminary August manufacturing PMI readings suggested that a fragile recovery is possibly establishing itself. Finally there was a dramatic session for the Nasdaq on Thursday as routing errors just after midday forced a three-hour shutdown of its trading system.
For the week, the DJIA fell 0.5%, the S&P500 gained 0.5% and the Nasdaq added 1.5%.

- Little more than a year after it was embarrassed by the mishandling of the Facebook IPO, Nasdaq management was widely criticized for how it dealt with Thursday's trading outage. During the extended downtime, the company did little to inform customers and the media what was going on, leaving them to speculate that it might be a hacker attack or the result of high frequency trading overwhelming the system. The day after the incident, the company said it had found no system intrusions or unusual bursts of quotation activity, and that it will work to communicate better with the public. In a related story, BATS and DirectEdge were reported to be in advanced merger talks. Together the two electronic trading platforms would surpass Nasdaq as the second largest equity trading platform by volume.

- Higher mortgage rates are starting to impact the US housing market. Data out this week showed that US new home sales declined to their lowest level in seven months in July, widely missing expectations. The June new home sales data was revised lower as well, while median prices in July flattened and supply jumped to 5.2 months of inventory from 4.3 months in June. July existing home sales rose to their highest levels since late 2009, although that was attributed to nervousness about rising interest rates forcing potential buyers with a strong incentive to close deals.

- There was some debate about the real meaning of the FOMC minutes released on Wednesday. The WSJ's Hilsenrath asserted that the minutes reaffirm the Fed's existing timetable, which suggests the taper could begin as early as September. Others highlighted apparent growing uncertainty about the labor market and continuing low levels of demand. Many have pointed out that "a few" officials warned against putting too much attention on the "illustrative" 7% unemployment threshold and that "several" officials said they were "willing to contemplate lowering the unemployment rate threshold."

- The Kansas City Fed's Jackson Hole symposium got underway on Friday. Chairman Bernanke is skipping the conference as are many other global central bankers, making for a pretty low-key event. In interviews, Fed dove Bullard said the FOMC should be in no hurry to reduce QE purchases. Moderate, non-voter Lockhart said he would support a move in September if the data was still pointing toward sustainable improvements, but cautioned that numbers out so far do not point to a strong pickup in economic activity later in 2013. Hawk Fisher said the data makes him believe September is the time to begin the taper and said he was not alone in that belief.

- Just a month after Microsoft reported terrible Q4 results (with EPS at $0.52 versus expectations of $0.75), the company announced that it was looking for a replacement for long-serving CEO Balmer, who will serve until a successor is found. Rumors of the move had been circulating for some time. After years of consecutive mediocre and failed product launches under Balmer, investors responded with enthusiasm, sending shares of MSFT up as much as 9% in the immediate aftermath of the announcement on Friday. Elsewhere in tech, Hewlett-Packard reported troubling signs in Q2 results: the PC personal systems unit has seen slumping revenue for a while but the 9% slide in both the enterprise and enterprise services units - former islands of strength - was unexpected. CEO Whitman admitted that she no longer see a scenario in which revenue will return to year over year growth in FY14 because of the worsening market environment.

- More major retailers reported quarterly results this week. On the whole, teen apparel names reported terrible results. Troubled JC Penny blamed its 12% SSS decline on continuing fallout from the Ron Johnson experiments. Abercrombie & Fitch and Aeropostale both widely missed estimates and saw double-digit negative comps, due to the "challenging retail environment." Retailers catering to a more mature age bracket did better: Gap and Limited Brands both had solid quarters featuring positive comps. Best Buy surprised everybody by widely beating earnings expectations, although executives cautioned that most of the better outcome was due to cost savings. Target reported disappointing results and trimmed its outlook, citing slower than expected growth in its new Canada operations, and saying consumers were channeling their spending toward big ticket items like home improvement and autos. In their Q2 reports this week, home improvement names Lowe's and Home Depot continued to benefit from the positive housing market, though both warned about a tougher second-half environment.

- Rising interest rates in the US did little to benefit the greenback against the euro and yen this week, although most other global currencies have weakened against the dollar. Against the currencies of emerging market nations that run large current account deficits, the dollar remains king. Both the Turkish Lira and the Indian Rupee moved out to their worst levels ever against the dollar: USD/TRY passed the 2.00 level and USD/INR moved above 65.50. Brazil Central Bank Chief Tombini pulled out of the Jackson Hole symposium to confer with President Rousseff about the Brazilan Real, which hit five-year lows around 2.45 late in the week. Central banks in Turkey, India and Brazil were active in the market as they tried to stem the losses.

- EUR/USD mostly traded within the 1.32-1.34 range where it has spent the past two weeks. On Tuesday the pair broke out to 6-month highs around 1.3450. In its monthly report, the Bundesbank wrote that ECB forward guidance was not a change in policy and that a rate hike was possible if inflation pressures emerge. GBP/USD hit two-month highs near 1.5670.

- Confirming the Euro Zone crisis is not yet over, German officials admitted this week that there would most likely be a third bailout for Greece. During a campaign speech, Finance Minister Schaeuble said as much although many analysts had assumed the ruling coalition would wait until after the September elections to officially admit it. Chancellor Merkel repeated Schaeuble's admission but ruled out another debt haircut and said nothing would happen on the Greek issue until mid-2014 or even 2015. The Bundesbank's Assmusen said it would not be known until the spring whether Greece can achieve a primary surplus, which would dictate their potential aid requirements.