Friday, June 12, 2015

Market Week Wrap-up Markets Climb a Greece'd Pole
Fri, 12 Jun 2015 16:06 PM EST

Hopes for a final Greece deal rose and then slid back again this week, talking equities, FX and bonds along for the ride. The feeling that a deal was imminent plus solid advanced retail sales and job openings data in the US generated positive sentiment for most of the week. But hopes for a Greek deal were dashed on Thursday as the two sides couldn't overcome the final political roadblocks and negotiators left Brussels to regroup. Chinese stocks continued to run up, walking the Goldie Locks path between good-enough data and hopes for more stimulus efforts. Central banks in South Korea and New Zealand threw more logs on the fire with fresh rate cuts. Bonds remained volatile all week, with most benchmark government bond yields surging to YTD highs on Wednesday. For the week, the DJIA added 0.3%, the S&P500 edged up 0.1%, and the Nasdaq fell 0.3%.

The May US retail sales bounced much higher from April's dismal showing. Total retail sales increased 1.2% in May after an upwardly revised 0.2% gain in April. March sales were also revised higher, to 1.5% from 1.1% prior. The revisions to the March retail sales number suggest that the Q1 GDP could be revised up again in the third and final reading, while Q2 GDP could be stronger than expected. The JOLTS survey showed that job opening soared to an all-time record high in April, widely topping expectations and surging above March's rate. The quits rate, which is seen as an indicator of employee confidence, fell slightly in April to 1.9% from 2% in March.

Greece's European creditors applied maximum pressure this week to reach an agreement, but even that seems not to have been enough. Reports indicated that EU Commission's Juncker, Chancellor Merkel and President Hollande came very close to a final deal with Greek PM Tsipras midweek, but political resistance from Tsipras's Syriza party apparently derailed the agreement. On Thursday the IMF left negotiations and said that technical discussions on Greece bailout had halted after failing to make any progress, with major differences remaining unsolved. Meanwhile, the ECB raised its ELA ceiling for Greek banks to $83B from €80.7B prior, a notably large increase, but there was also speculation that the ECB was preparing to raise collateral requirements for Greek banks as soon as next week. Multiple press reports made the rounds on Friday that creditor nations were preparing for the potential of a Greek default, including possible capital controls.

The continuing bond selloff peaked on Wednesday morning, with the 10-year bund and UST yields rising to fresh eight-month highs, with the bund yield pushing above 1.0% and the UST coming within a few basis points of 2.5%. Ten-year gilt and JGB yields hit seven-month highs. The yield on the benchmark US Treasury note touched 2.493% and the bund peaked at 1.058% before both fell lower through week's end. Plenty of supply was one catalyst, as the US Treasury held sizable 3-, 10- and 30-year auctions, and there was another modest helping of corporate issuance to get through as well. Prices rebounded late in the week helped by consternation over Greece and potentially early positioning ahead of next week's FOMC meeting. The 10-year Bund yield dropped some 20+ basis points from earlier highs to finish the week below 0.85% while the US 10-year fell back below 2.4%.

There were two notable instances of verbal intervention by political leaders this week. After last weekend's G7 meeting in Germany, an unnamed French official said that President Obama had told G7 leaders he was worried by the strength of the dollar. The reports drew immediate dismissals by US officials, but EUR/USD moved up from 1.1100 to 1.1320 on Monday alone. Then on Friday, Chancellor Merkel said that the "very strong euro" was making reform efforts more difficult in Spain, Portugal and Ireland, and called for "understanding when a central bank thinks about what you need to do when the inflation rate is so low." The move in EUR/USD was less dramatic after Merkel's remarks, with EUR/USD making a brief round-trip from 1.1230 to 1.1150 and back again.

Southwest and American Airlines made more cautious comments about industry revenue trends, echoing similar remarks by Delta last week and compounding the damage Southwest did in May (when it warned it would boost 2015 capacity by a high single digit percentage). American reduced its passenger revenue per available seat mile forecast and cut its margin guidance, while Southwest also made downbeat comments about its Q2 PRASM. These remarks, plus a report by industry group IATA that warned US airline revenues would contract 0.7% y/y in 2015, knocked US major airline stocks down as much as 7-9% by Tuesday, with only slight improvement through the week's end.

McDonalds disclosed its final public monthly same-store sales report on Monday. May was the firm's eighth consecutive month of comp sales declines, although it was the best reading since last October and the decline was less than expected. US comps continue to suffer from declining traffic and sharper competition.

At its annual developers forum, Apple launched its revamped 'Apple Music' service. The subscription based service is priced similarly to competing premium services but seeks to differentiate itself with the human touch of music experts curating playlists and running a 24/7 global radio station. Apple also previewed the next updates for its Mac, iPhone and Watch operating systems, adding new features including improvements to the Siri digital assistant and a feature that can block advertisements on mobile devices.

There was a marked absence of big merger deals this week, but a growing trend of US-listed Chinese companies announcing plans to go private and delist from US markets. In rapid succession, data-center firm 21Vianet Group, social site Renren, real estate firm E-House, and movie production company Bona Film Group received strikingly similar "preliminary non-binding going private" proposals from management led groups. The rush to enter going private proceedings is being driven by large double digit gains on China's A-share market for domestically traded stocks, offering firms outsized gains over the US. Moreover, looser listing rules at home will aid efforts to relist on Chinese exchanges.

There were marked improvements over the rough March/April figures in China's May trade report, with a trade surplus just shy of the peak seen in February. The four-month low of 1.2% seen in China's May inflation reading should help sustain the PBoC's easing bias intact, while other measures, such as recovery in M2 money supply and new loans, were more decent. The Shanghai Composite managed a 2.9% gain for the week, shrugging the high-profile deferral by MSCI to include the A-Shares in its emerging market index due to unresolved market accessibility issues.

Japan Q1 final GDP expanded +3.9%, much better than preliminary +2.4% figure, mainly on the much higher revision in the CapEx growth component. The Nikkei225 was marginally lower for the week however, as JPY short positions were scuttled by unexpected remarks from BOJ governor Kuroda who said the selloff in the currency may be near the end, sending USD/JPY to a 2-week low of 122.50.

It was also an active week for Asia-Pac central banks. On Thursday, the Reserve Bank of New Zealand surprised traders with a 25bps rate cut to 3.25% - the first loosening in four years - and signaled at least one more cut this year with a 60bps revision to its 90-day bill rate forecast. Bank of Korea also succumbed to the economic risks of a MERS outbreak, cutting rates to record low 1.50% and paving the way to the likely downgrade of GDP projections due to slowing consumption and exports trends.