Friday, August 30, 2013

Market Week Wrap-up  Weekly Market Update: Summer market sees mixed data, awaits Syria strike

Thin, low volume summer markets got pushed around as investors rushed to reduce risk early on this week, and everyone awaited a US decision on whether to conduct a military strike against Syria. By midweek stock markets were down modestly, leaving the S&P about 5% off of its all-time highs. Oil prices spiked higher, weighing on sentiment; by Wednesday Oct WTI crude shot above $112 reaching levels not seen in more than 2 years. Gold prices also caught a bid sending prices above $1,430 for the first time since May as flight to safety bids returned. US Treasury markets rallied sending the 10-year yield back down towards 2.70% before rebounding. By Friday EUR/USD was trading just below its 1.32-1.34 August trading range as Syrian war fears strengthened the dollar over the week. For the week, the S&P500 and Nasdaq each fell 1.9%, while the DJIA dropped for the fourth straight week, losing 1.4%, for its longest losing streak since last November.

Early last week, reports began to emerge from Damascus that the Syrian regime had used chemical weapons against rebel-held neighborhoods in the capital and killed hundreds of its own citizens. As evidence mounted, it became clear that Assad has crossed the 'red line' defined by President Obama for the western powers to take action against the Syrian government. Even as China and Russia blocked serious discussion of the issue at the UN, the US and its allies said there would be 'serious repercussions' in response to the attack in the form of military action. The march towards military intervention hit a snag after a non-binding motion on Syria military action failed in the UK House of Commons, deflating the political will of America' s staunchest ally. Friday afternoon, US Secretary of State Kerry forcefully stated that "we know" the Assad regime used chemical weapons on civilians, and that the UN report will not add any new information, making it fairly clear that the US will go ahead with a limited unilateral military strike within days. The window for action seems to be set for some time after UN inspectors leave Syria on Saturday and before the President travels to the G20 in Russia early next week (where he may receive a chilly reception).

- US data was mixed again this week. Orders for durable goods dropped 7.3% in July, nearly twice the expected amount, and the first decline since March and the biggest falloff since August 2012. The key capital goods orders component fell 3.3%, versus expectations for a slight gain. The data is a blow for third quarter GDP and multiple analysts reduced their estimates for Q3 GDP after the data. The August consumer confidence index gained over the July result and topped expectations, however the present situation component fell from 73.7 to 70.7, its biggest drop since January. The June S&P/Case Shiller home price index was up very incrementally from May levels.

- A second look at US Q2 GDP revealed the economy grew at a stronger clip than first thought and above consensus estimates. The positive news was somewhat offset by the fact that the biggest surprise was in the inventory component, which was revised up a little rather than down as forecast, which could potentially weigh on Q3 growth prospects. Exports and spending on business structures showed substantial growth which some suggested continue to paint an overall positive economic picture that is consistent with the Fed beginning to pull back its asset purchases next month.

- Emerging markets currencies continued to struggle against capital outflows in anticipation of Fed tapering and on politically driven safe-haven flows. The Indian Rupee (INR) hits new fresh record lows against USD through the early part of the week. The USD/INR pair moved toward the 69 handle with the Rupee weakening on speculation that higher oil prices might increase the country's oil import bill. Other dealers noted the recent food security bill legislation that is intended to "wipe out" endemic hunger and malnutrition in the country at a budgeted annual cost of around $18B as another reason for the weakness. For the month of August, the rupee slumped 8.1%, its worst performance since 1992. The Turkish Lira currency (TRY) also hit new fresh record lows against USD, moving above the 2.0700 level at one point. Later in the week, emerging market countries took various domestic measures to stabilize their currencies. The India Central Bank RBI introduced a Forex swap window to meet USD requirements of three state oil-marketing companies that was seen reducing daily demand from the spot market by as much as $600M. Both Brazil and Indonesia raised interest rates. On Friday, Brazil Finance Minister Mantega said the BRIC's continue to make plans for establishing a joint bank and a joint reserve fund, and India Finance Ministry economic advisor Dasgupta went so far as to suggest that the India would welcome a joint currency intervention among the BRICs to stem currency depreciation.

- After two months of negotiations, Amgen has secured a deal to acquire oncology research shop Onyx for $125/share in cash, in a deal valued at $10.4B. This is up from the firm's initial offer of $120/share. The deal is being seen a key move for Amgen to restock its product pipeline in response to declining sales of its flagship anemia drugs. In separate M&A news, Verizon and Vodafone shares both rallied on Thursday after reports that the two had resumed talks for Verizon to reacquire Vodafone's 45% interest in Verizon Wireless. The deal is said to be north of $100B and could include a stipulation that Vodafone repurchase 23% stake in Vodafone Italia. On Friday, press reports indicated that GE Capital may be close to spinning off its retail lending unit which reported $15.5B in revenues in 2012.

- The last of the Q2 retailers' earnings reports trickled this week. Overall results were mixed with Big Lots ($0.31 v $0.25e) and Guess ($0.52 v $0.36e) trading higher after earnings and Tiffany and Williams-Sonoma trading lower after failing to meet outsized expectations. After being chastised by the JC Penney board earlier this month, Pershing Square's Ackman abruptly gave up on his designs to reboot ailing retailer, dumping his entire 17.7% stake at $12.60/share. In other earnings Joy Global shares traded sharply lower despite a top line beat ($1.70 v $1.36e) after the firm forecast its order rate would deteriorate. continued to prove short-sellers wrong taking another leg up after beating estimates and raising guidance. Shares of JPMorgan Chase were lower on the week after the financial press reported that the US government may be seeking as much as $6B in damages from the firm related to allegations it misrepresented securities sold to Fannie and Freddie.

- Markets were looking for dovish commentary from BOE governor Carney in his first public speech since taking the helm at the central bank in early July. He reiterated that hitting the 7% unemployment target would not automatically trigger higher rates and that he was prepared to ease further if needed. However, he commented that he would not hesitate to increase rates either. The GBP/USD initially tested session lows of 1.5429 but move 100 pips off its worst levels after his remarks.