Friday, June 20, 2014

Market Week Wrap-up  Weekly Market UpdateDovish Fed Aids Sentiment

- Market complacency hit new highs this week as both the DJIA and the S&P500 both pushed out to fresh record highs this week. Meanwhile, the VIX dipped below 10.40, its lowest level since early 2007. The Fed decision on Wednesday held no surprises, although during the post-decision press conference Fed Chair Yellen qualified her definition of the "considerable period" between the end of the taper and rate hikes. Yellen said there was "no mechanical formula" defining this span of time, further distancing herself from the gaff at her first press conference when she suggested it would be about six months. Markets took the statement as dovish, greatly aiding positive sentiment. The bleeding continued in Iraq and Ukraine all week, but neither conflict managed to distract markets as they have been able to do in the past. For the week, the DJIA rose 1%, the S&P500 climbed 1.4%, and the Nasdaq gained 1.3%.

- The US May CPI report showed prices at a key threshold: the core CPI figure hit 2.0%, which suggested inflation is getting close to the Fed's target rate. On a sequential basis, monthly core CPI increased at its fastest pace since August 2011 while the y/y figure is at the 2.0% level for the first time since February 2013. Keep in mind that the Fed watches the PCE series as its main gauge of inflation; in updated economic forecasts accompanying Wednesday's decision, the Fed slightly increased its 2014 PCE forecast to 1.5-1.7% from 1.5-1.6%. The May PCE data will be released on June 26th. In her post-decision press conference, Yellen said the CPI data was "noisy," which some people believed meant she wasn't too worried about inflation at the moment.

- Housing starts fell 6.5% in May, for the first decline in the series in four months, while the April figures were revised slightly lower. The decline was broad-based across regions and type of construction. Single-family housing starts fell 5.9%, while multifamily starts fell 7.6%. Permits declined as well, led lower by a sharp decline in multi-family permits.

- Conflict in Iraq and Ukraine continued without interruption. After being knocked from the headlines by ISIS's offensive in Iraq, the conflict in eastern Ukraine was heating up again. NATO Chief Rasmussen warned that Russia was boosting troop levels on Ukraine's borders and there were reports of Russia sending tanks, armored vehicles and artillery over the border to resupply pro-Russia insurgents. Ukraine President Poroshenko declared a one week unilateral cease-fire, however Russia and many other observers see it as a demand for surrender by the rebels, and not the start of a negotiation. In Iraq, government forces seemed to check ISIS's advance north of Bagdad as the Baiji refinery traded hands all week. Prime Minister Maliki appeared to lose support of Iran, the US and even Grand Ayatollah Ali al-Sistani, as all three power centers signaled a new government was needed to cope with the new situation on the ground. Energy prices did not move any higher, with front-month WTI spending most of the week around $107. Gold spiked 3.3% on Thursday, hitting one-month highs, a move attributed to geopolitical tensions, an accommodative Fed, and the continued unwinding of Chinese commodity financing deals.

- Amazon unveiled its new smartphone platform this week, dubbed the Fire Phone. As expected, it features multiple cameras that support a 3D display, but the more interesting aspects of the new device went well beyond graphical gimmicks. The device's Firefly system allows users to take a picture of any product from books to barcodes and have the device find the product on Firefly also reads text and numerals via a strong character recognition system, and can identify music and open songs on various services. Fire Phone sells for about the same as the iPhone: $200 with a two-year contract from AT&T, although the devices have more internal storage.

- In earnings, FedEx had a very good fourth quarter and offered a strong initial FY15 forecast. BlackBerry continued to restructure its business in its first quarter for a more modest market position. The firm's margins rose firmly for a second consecutive quarter and its quarterly losses continue to fall. Rite Aid's first quarter revenue declined 50% y/y thanks to higher drug costs and steeper reimbursement rate reductions, although comps held up well. After reporting another disappointing quarter, Darden charted a course for its post-Red Lobster business, offering an initial view of its FY15 outlook. Oracle missed expectations and analysts were skeptical of its touted transition into cloud services.

- Steel names Nucor, AK Steel and Steel Dynamics provided guidance on second quarter results. AK Steel and Nucor missed expectations: AK blamed lingering effects of the winter weather and hedging losses, Nucor said imports continue to negatively impact pricing and margins. Meanwhile Steel Dynamics's outlook was in line with consensus views. STLD said profitability would be higher in the quarter on a sequential basis as both shipments and metal spreads are improving, despite significantly increased import activity. Also, ConAgra trimmed its fourth quarter guidance slightly due to volume declines in its Consumer Foods segment, as well as weak profits for the Private Brands segment.

- Another round of huge M&A deals were announced this week. The biggest was Medtronic's agreement to buy competitor Covidien for $42.9 billion in cash and stock. Analysts suggested that the deal would be burdened by heavy political and regulatory attention, while also noting that there would be limited opportunities to extract cost synergies because of the narrow product overlap between the two companies. Level 3 Communications entered a deal to buy TW Telecom in a transaction worth about $5.6 billion. Level 3, one of the biggest backhaul Internet service providers, gets direct access to large- and medium-sized business customers. SanDisk signed a deal to acquire fellow flash memory maker Fusion-io in an all-cash deal that values it at $11.25/share, or $1.1 billion.

- Cable crossed the 1.70 level, which has been a point of resistance on GBP/USD's upward march. The pair saw its highest level since July 2009 around 1.7050 as traders continue to position themselves for rate hikes later this year. Multiple BoE figures through their weight behind hikes, with dove Miles saying there was a clear chance of a hike before next spring and hawk Weale saying that the BoE could tighten policy even with greater labor market slack. EUR/USD continues to hold above the post-ECB low of 1.3503, and fluctuated between 1.3510 and 1.3644.

- The slowdown in the Chinese property sector became ever more apparent after the May price data revealed even top-tier cities are no longer immune to the downturn. Prices rose in just 15 out of 70 cities (vs. 44 in the prior month) while falling in 35, versus just 8 prior. Average prices across 70 cities were also down for the first time in two years, falling 0.2% m/m. Policymakers in Beijing have yet to show any signs of panic, with PBoC official referring to the downturn as "necessary and inevitable," however foreign investors are taking note. May FDI slowed to a one-year low of +2.8% YTD and outright fell by -6.7% y/y for the month of May alone. Traders will tune in for China's flash manufacturing PMI figures on Sunday evening for signs of further recovery in the HSBC index.

- Japan saw a mixed round of merchandise trade data, as deficit narrowed more than expected but overall exports fell for the first time in 15 months. Shipments to China rose just 0.4% vs 9.8% in April and US exports fell for the first time in 17 months by 2.8%. The smaller deficit was largely the result of the unexpected decline in imports, as Japan's crude oil intake slumped by nearly 20%. Late in the week, Japan's Cabinet Office cut its assessment of imports for the third consecutive month while maintaining its overall view of economy maintaining the course of moderate recovery.