TradeTheNews.com 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
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.