Friday, May 15, 2015

Market Week Wrap-up  Weekly Market Update: Turbulent Markets Draw More Stimulus, May Delay Fed Liftoff
Fri, 15 May 2015 17:03 PM EST

Equities wove in and out of negative territory this week and bond markets were choppy, even as the DJIA and S&P500 quietly tested all-time highs. China started the week off with more stimulus - the PBoC cut rates for the third time since November. The US April retail sales and industrial production reports were quite soft, lending ammunition to participants saying the Fed would not be raising rates this summer. ECB President Draghi dismissed criticisms of his €1.1 trillion QE program on Thursday, reiterating that the ECB would buy the full allotment under the program and insisting that the plan would help prepare the Eurozone for higher rates. Greece made minor concessions to its partners on asset sales, but little movement is apparent in negotiations. For the week, the DJIA edged up 0.4%, the S&P500 added 0.3% and the Nasdaq rose 0.9%.

There were two April US economic reports with disappointing numbers but positive revisions to the March data: advance retail sales and industrial production. Retails sales were pretty weak, with total sales and the control group (which feeds into the GDP reading) unchanged, widely missing expectations. Meanwhile, the March headline sales figure was revised from 0.9% to 1.1% and the control was revised from 0.3% to 0.5%. Sales in April were curbed by declines in big-ticket receipts such as autos, furniture, electronics and appliances. The Atlanta Fed lowered its GDPnow rolling Q2 GDP forecast to 0.7% from 0.8% in the wake of the retail sales data. Likewise, industrial production was lower than expected, but the March report was raised to -0.3% from -0.6%. The University of Michigan consumer sentiment index on Friday also disappointed, registering its lowest reading since October and showed inflation expectations are rising.

The doves were out for the Fed this week with Dudley and Williams reiterating data dependence and cautioning again that global markets are sure to have some reaction when Fed rate lift off occurs. Williams also said he agrees with the sentiment expressed by Chair Yellen that equity valuations are quite high.

Negotiations between Greece and its European creditors went nowhere again this week. On Tuesday, Greece made its latest debt payment to the IMF on time, however Athens used €650M in funds from its own IMF account to help meet the €750M obligation, underlining the depth of the nation's cash crunch. First quarter GDP data revealed that the economy has already returned to recession. Finance Minister Varoufakis stepped up his war of words with Eurozone policymakers, saying he wished his country still had the drachma and warning he would not sign any bailout plan that would send his country into a "death spiral."

A return to GDP growth in France and Italy in Q1 helped boost eurozone economic growth in Q1 to +0.4% over the prior quarter and +1.0% on an annualized basis, its best rate in years. As of Q1, all the major eurozone economies are growing, cementing hopes for a real economic recovery. The caveat was Germany, where Q1 GDP was only +0.3% q/q, missing expectations for +0.7% growth. In the UK, the Bank of England cut its 2015 growth forecast from 2.9% to 2.5%, and 2016 from 2.9% to 2.6%, citing higher interest rates, stronger GBP and weaker productivity. EUR/USD took another leg up on the better data, rising from lows of 1.1140 to test three-month highs around 1.1450 on both Thursday and Friday. Traders note that after trading down five big figures from 1.1000 to 1.0500 in the first two months of the year, EUR/USD is making measured moves upward to test five big figures up from 1.000.

The bond selloff claimed victims in Asia this week, as a Japanese 10-year bond auction drew bids for 2.24x, the lowest in six years. Yields on German and US paper spiked again in the first half of the week, but appeared to reverse after testing some key technical levels. The 10-year UST touched 2.370% on Tuesday, its highest level since last November, but had dropped more than 20 basis points to trade around 2.15% on Friday. The 10-year bund peaked at 0.735% on Wednesday, but had dropped over ten basis points to 0.62% by Friday. Analysts continue to argue over the causes, with many citing poor liquidity and the stampede out of long positions as the best candidate for the moves in yields.

Shares of major US retailers lost ground this week after the April retail sales report and some mixed-to-poor quarterly reports. The biggest loser was Kohls, with shares off nearly 14% on the week after the firm missed revenue expectations, after reporting tepid comp growth and refraining from offering guidance. Fellow department store name Macys lost ground after missing both top- and bottom-line expectations and seeing comps go negative.

Cisco reported a modest y/y gain in revenue in its third quarter, with both earnings and revenues just a hair above expectations. The firm's fourth-quarter guidance was right in line. In his last quarterly conference call as CEO, John Chambers addressed emerging technologies head on, claiming that Cisco was slimming teams and speeding up development to compete with software-defined networking startups. Chambers also shot down rumors that Cisco was considering a takeover approach for security specialist FireEye.

By a narrow margin, DuPont investors rejected Nelson Peltz's attempt to get on the board at the annual meeting, the first failure for an activist campaign mounted by Trian Fund Management. The outcome was a victory for DuPont Chairman and CEO Kullman, who refused to settle the proxy fight by giving a board seat to Peltz. Trian had splitting DuPont into two companies.

China continues to ramp up its stimulus. Over the weekend, the PBoC cut key rates for the second time this year. The easing - a 25bp cut in deposit and lending rates to 2.25% and 5.10%, respectively - was expected after the downbeat trade numbers last week. The cut was further justified by April industrial production data missing expectations by a tenth of a percent, and retail sales also disappointing and touching a multi-year low (at +10%). Money supply and credit figures were similarly worrisome, as M2 slowed to a record low of 10.1% and new loans missed expectations by over CNY100B at just over CNY700B, a 4-month low. Expectations for steady easing helped the Shanghai Composite to another 2.4% rise for the week, despite the profit-taking on Friday attributed to strong demand for a new batch of IPOs.