Thursday, July 3, 2014

Market Week Wrap-up  Weekly Market Update2014 at the Halfway Point

- Low rates, plenty of central bank accommodation and record low inflation levels helped global risk assets extend their long run of strong advances in the second quarter of 2014, which ended on Monday. In the US, equity indices saw their sixth straight quarter of gains: the S&P500 gained 4.7% (up 6.1% YTD), the Nasdaq added 5% (up 5.5% YTD) while the DJIA only gained 2.2% (up 1.5% YTD). This week more strong data help nudge the DJIA and S&P500 to fresh record highs, with the June jobs report and other economic data aiding sentiment. US momentum has helped sustain global gains, however there are signs of cracks: June PMI reports out this week were mixed and/or flattish in Europe, Japan and China, with practically no surprises either to the up or the downside. Inflation in Europe remains stalled at a dangerously low level, while rumblings in the Chinese property market scare everyone. For the week, the DJIA rose 1.3% and reached the 17,000 milestone, while the S&P500 added 1.2% and the Nasdaq surged 2%.

- The June jobs report was much, much stronger than expected, with both the nonfarm (+288K) and private payrolls (+262K) figures crushing expectations, and the April nonfarm payrolls were revised up to 304K from 282K. Unemployment dropped to 6.1% without any further deterioration in the labor force participation rate. After the data, Goldman Sachs now sees a risk of rate hikes in late 2015, but refrained from formally changing their standing guidance for hikes starting in Q1 of 2016. JP Morgan pulled forward expectations for rate hikes to Q3 of 2015 from Q4 prior.

- The conflicts in Ukraine and the Middle East raged on this week, however WTI and Brent futures fell to three-week lows thanks to silver linings among the geopolitical storm clouds. In Libya, the government reached a deal with rebels to return oil ports and end a blockade, which should release about 500K bbls of capacity that had been on ice for about a year. In Iraq, ISIS rebels christened the territories they held as "the Islamic State" and declared that it was the sacred duty of all Muslims worldwide to obey ISIS leader Abu Baker al-Baghdadi the caliph, or the successor to the Prophet Mohammed. Fighting continued throughout the regions around Baghdad as the US rushed in more drones and hellfire missiles, while ISIS captured key border towns, however there has been little impact on Iraq oil exports. The ceasefire between Ukraine and pro-Russia rebels in the eastern part of the country expired late Monday and Kiev launched an aggressive offensive against rebel-held towns and made rapid progress. France, Germany and Russia said they had reached a deal to set up fresh talks for another ceasefire, which could arrive as soon as Saturday.

- General Motors announced another six safety recalls this week, covering 7.6 million vehicles. The additional recalls brought GM's total recalls this year to 29 million units, a number greater than the company's combined US sales for 2005 to 2013. In addition, Ken Feinberg outlined the terms of GM's compensation program for customers hurt in accidents caused by faulty ignition switches. The company will pay anyone - drivers, passengers or pedestrians - who proves they were injured in a crash tied to the faulty switches and the fund will have no monetary cap.

- Total US June auto sales rose 1.2% to 1.4 million units, pushing the annualized selling rate to 16.98 million, its highest pace since July 2006. GM sold 267.5K units, up 1% y/y, beating expectations for a roughly 6% decline in sales. Meanwhile Ford's sales fell 6%, right in line with expectations, and truck sales fell at an even steeper rate. Nissan and Toyota saw good sales gains, while Honda's sales fell 5.8% y/y.

- In the first four days of trading, shares of camera-on-a-stick company GoPro doubled from the IPO price of $24. Wednesday saw the stock bounce lower, with shares dropping 14%. The reversal has been partially ascribed to short sellers entering in force. One analyst said the cost of borrowing GoPro shares has become one of the highest on the market.

- JPMorgan CEO Dimon disclosed this week that he has throat cancer, albeit a very mild and highly treatable form of the disease. Dimon said he plans to start treatment shortly and expects to continue working during his treatment and claimed his prognosis is excellent.

- The first reading of Eurozone June CPI saw the headline figure stalled at four-year lows of 0.5%, although the core figure ticked slightly higher, to 0.8% from May's 0.7%. Last week, preliminary German June CPI had risen to 1.0%, raising hopes of a better showing. The inflation data hardly altered expectations for no ECB action at the decision on Thursday, and the only announcement of note at the meeting was that the ECB would shift to a six-week meeting schedule and begin publishing meeting minutes, effective in January 2015. EUR/USD tested 1.3700 on Monday and Tuesday and then fell gradually in the lead-up to the June US jobs report. On Thursday morning, EUR/USD tested below 1.3600 on the good jobs data.

- The Bank of Japan's Q2 Tankan survey showed large manufacturing fell for the first time in six quarters thanks to the consumption-tax related slowdown in economy. The industrial CAPEX forecast for FY14/15 surprised to the upside however, rising 7.4% on composite basis and 12% for manufacturing. The labor earnings survey saw base wages rise 0.2%, the first increase in over two years, but real wages (ex-inflation) registered their largest decline since Dec 2009. Meanwhile, the Japanese Business Federation (Keidanren) said pay at large Japanese companies rose 2.3% following spring negotiations, the biggest increase in 15 years.

- China's official manufacturing PMI hit a six-month high, meeting consensus at 51.0. Among the more notable components, New Exports returned to expansion of 50.3 v 49.3 m/m and Employment rose to 48.6 from 48.2. HSBC final PMI remained in expansion as anticipated by recovery in the Flash data, coming in at 50.7 v 50.8 initial estimate. HSBC chief China economist said the latest figure "confirms the trend of stronger demand and faster de-stocking", but also noting "there are still downside risks from a slowdown in the property market, which will continue to put pressure on growth in the second half of the year."