Friday, August 9, 2013

Market Week Wrap-up  Weekly Market Update: Chinese data provides a boost in an otherwise lackluster week

- There was sluggish, lower volume trading this week as global markets appear to have entered some late summer doldrums. Decent US and Chinese trade data and pretty solid July Chinese economic data helped tamp down fears about a Chinese economic slump. The US weekly jobless claims crossed a key level as the four-week average of initial claims fell to levels last seen before the official beginning of recession in November 2007. Europe saw good UK industrial production data and decent final July European services PMI.I However events looming later in September seemed to dampen enthusiasm, while the 1700 level in the S&P500 provided an insurmountable psychological barrier for US equities. Note that there has been much talk among analysts that next month will see a jump higher in market volatility, with a possible Fed taper, fiscal policy battles in Washington and elections in Germany all likely contributing to an unsettled situation. For the week, the DJIA fell 1.5%, the S&P500 declined 1.1% and the Nasdaq dropped 0.8%.

- The emerging consensus for a reduction in Fed QE purchases starting in September was reinforced this week by comments from Fed officials Fisher, Evans and Lockhart. Known hawk Fisher said the Fed should start the taper in September unless it sees any disturbing data, while the more dovish Evans said he would not rule out a taper beginning in September. Lockhart commented that monthly NFP gains of around 180-200K would be the right level to start tapering.

- Trade data published by the US and China got plenty of attention this week. The US June trade deficit dropped 22.4% to $34.2 billion, the lowest level since October 2009 and well below May's $44.1 billion figure. Exports rose slightly to $191.2 billion. Analysts point out that the trade deficit is turning out to be much lower than assumed by the Commerce Department, which could put the second reading of Q2 GDP as high as +2.3% versus the advance estimate of +1.7%. The China July trade data saw imports up 10.9% y/y and exports to the US up more than 5%.

- The other July data out of China suggested talk about an economic slowdown may be overdone. Industrial production pushed out to +9.7%, a five-month high, complementing the good trade figures and the very good PMI data out last week. Auto sales and bank lending topped expectations, while CPI and PPI statistics indicated inflation is relatively contained. Electricity production, widely considered a more honest gauge of Chinese growth, surged 8.1% in to record levels. Commodities got a jolt in the arm from the data, with copper up more than 3% on the week.

- Data indicates that the great rotation out of bonds is continuing. In the week ended August 7, investors redeemed $4.0B from Treasury bond funds, equal to 1.3% of assets under management, making for the worst week of outflows on record for the asset class. In a note to investors, a BoA/Merrill analyst noted that in the same week, $10B flowed into developed market equities.

- Dow components IBM and Disney lost a lot of ground this week, weighing on the index. Disney mostly met expectations on decent y/y growth in its Q3 report, however it also disclosed that it would take a loss of $160-190M on the 'Lone Ranger' film a little more than a year after its big write off for 'John Carter.' IBM fell on reports that most workers in its US hardware unit would be required to take one week off with reduced pay due to continuing slack in markets. In addition, Credit Suisse cut IBM to underperform from neutral on Tuesday, warning that future organic growth will be challenging.

- Tesla has sustained 20% gains following the firm's stunning outperformance after both earnings and revenue absolutely crushed expectations in its second quarter. Margins were very good and deliveries hit 5,000 cars versus the firm's expectation for 4,500. Multiple analyst firms raised PTs and ratings on the name. The company is now valued at about $18B, approximately half the valuation of Ford, which prompted Forbes to ask whether it's not a case of "irrational exuberance."

- JC Penny gained approximately 10% on Thursday after reports that Bill Ackman was pushing the company's board to speed up the search for a new chief to replace interim CEO Ullman within a month or so. Ackman said CEO Questrom could return as chairman under the right conditions. Shares fell 4% or so after the board shot back that it disagreed with his position, prompting Ackman to demand a board meeting ASAP.

- Last week and into the first half of this week the 1.3300 level in EUR/USD provided insurmountable resistance. The US trade data on Tuesday was not able to propel the dollar higher, but the combination of disappointment with the BoE inflation report and a big gain in Chinese imports from the US in Wednesday's China trade report did the trick. EUR/USD broke above 1.3300 and tested 1.3400 on Thursday for the first time since mid June. Dollar strength didn't last and EUR/USD closed out the week below 1.3350. Analysts say that against G10 currencies (particularly the EUR), the greenback is having real difficulties and could come under pressure over the next few weeks, while the opposite is true for the currencies of nations running a current account deficit.

- The BoE Inflation Report was the highlight of the week in FX markets. The BoE has followed in the footsteps of the Fed and the ECB and offered formal policy guidance, pledging not tighten policy until unemployment falls below a 7% threshold. There were two caveats to this guidance: rates could rise even with unemployment above threshold if inflation was above 2.5% in 18-24 months or QE policies threatened "financial instability." GBP/USD fell 100 pips to approach the 1.5200 level in the immediate aftermath of the report before bouncing higher to the 1.55 area through the latter half of the week.

- The week-long slide in the Nikkei225 strengthened the yen. USD/JPY continued to retrace after the failure to hold above the 100.00 last week. The pair traded below 96.00 briefly on Thursday following the BOJ decision, which did not include any fresh stimulus measures. The yen closed around five-week highs on Friday.

- AUD/USD dropped to three-year lows below the 0.89 handle last week. Weak data and the China slow down has driven the aussie lower. The Australia Central Bank cut its main rate by 25 bps to 2.5% as expected on Tuesday, and the decision plus the better China data helped push AUD/USD back up to the 0.92 handle. Dealers noted that the statement was less dovish compare to a recent speech given by Governor Stevens in late July.