TradeTheNews.com 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.
