TradeTheNews.com Weekly
Market Update: Greece Endgame in Sight, Fed Stays Dovish
Fri, 19 Jun 2015 16:11 PM EST
Global markets were seen approaching or crossing key thresholds this week. At
Wednesday's post rate decision press conference, Fed Chair Yellen said
conditions were still not ripe for starting rate hikes, citing continued labor
market slack and weakness in wages. Fed dovishness help propel stocks higher
and the Nasdaq closed at a new all-time high of 5,143 on Thursday, finally
topping the all-time high set on March 10th, 2000 at the height of the dot com
bubble. Greece and its creditors remained at an impasse, failing to bring any
new ideas to a meeting of European financial ministers on Thursday. An
emergency summit of euro zone leaders on Monday appears to be the last chance
to change the course of events flowing toward a Greek default. In Asia, both
the Shanghai and Shenzhen stock markets fell into correction territory, as
liquidity concerns pummeled the markets after regulators again scolded brokers
about excessive margin trading. Even as China sank, US stocks had their best
week in two months: the DJIA added 0.6%, the S&P500 rose 0.7%, and the
Nasdaq gained 1.3%.
The Fed statement on Wednesday was updated to acknowledge economic activity has
expanded moderately, the pace of job gains picked up, underutilization of labor
resources diminished, moderate spending growth, and stabilization in energy
prices. But on the key issue, there was no change: inflation continued to run
below target. In March, the dot chart gave a sense that the Fed would tighten
by at least 50 bps in 2015 and quite possibly more. The updated projections
showed more members were now anticipating only one 25 bps hike this year,
though some still see one or two in addition to that. Chair Yellen explained
that conditions have not yet been met for a rate hike, and urged Fed watchers
to focus more on the shape of the rate policy cycle than on when rate liftoff
occurs. After the policy statement, Goldman Sachs said it now believes the Fed
will wait until December to raise interest rates, pushing back its forecast for
rate liftoff by three months.
Pessimism regarding the final act of the Greece bailout drama waxed and waned this
week, with passing headlines about possible imminent deals outweighed by more
material statements from officials on both sides that the game was just about
over. June 30th is the unavoidable deadline, and IMF Chief Lagarde warned that
the payment due at that time was definitive and there would be no grace period
or possibility of delay, while Greek officials confirmed there was no money in
the till to make the payment. After no progress was made at the Eurogroup
meeting on Thursday, a summit of euro zone leaders was hastily arranged for
next Monday to give Athens one last chance to submit concrete concessions. As
much as €3.2 billion leaked out of the Greek banking system this week,
shrinking total deposits to around €125 billion, even as the ECB doled out two
ELA hikes to prop up Greece's financial system through Monday.
EUR/USD was notably less volatile in the first half of the week, with the pair
mostly confined in a 1.1200-1300 range. The more dovish tone in the Fed
decision sent EUR/USD higher, with the pair around the 1.1400-1.1440 area on
Thursday, then lower through week's end. Bond market volatility also cooled off
considerably, with much tighter ranges seen in yields.
There were contrasting June regional Fed manufacturing reports. The New York
Fed's Empire index unexpectedly dropped into negative territory (-1.9 v +3.1
m/m) and saw weak new orders (-2.1 v +3.9 m/m). Meanwhile the Philadelphia
Fed's index more than doubled (15.2 v 6.7 m/m) and new orders rose to their
highest level since November 2014 (15.2 v 4.0 m/m). The Commerce Department's
May industrial production saw a slightly m/m contraction, while the April data
was revised to a steeper contraction. The May CPI data was a bit softer than
expected, with lower food and energy prices responsible for much of the
weakness. The shortfall in the monthly increase resulted in an unchanged y/y
reading.
May housing starts declined somewhat from the seven-year highs seen in the
April numbers. Meanwhile, the May building permits rose to an eight-year high,
topping the April figures by 12% or so. Most of the surprise was in the
volatile multi-family component, where permits rose to a 25-year high of 592K,
largely reflecting a doubling y/y in the Northeast region. Single-family
permits were only up 2.6% y/y, just shy of the cycle high of 685K seen in
December.
Bank of America/Merrill Lynch released a report this week that shed more light
on the great bond selloff. The report showed bond funds suffered about $10.3
billion outflows last week, the largest redemptions in about two years. During
the same period, equity funds saw $10.8 billion inflows, the largest in three
months. The report also reminded readers that over the past six years, bond
funds have enjoyed $1.2 trillion inflows compared to only $573 billion to
equity funds.
Shipping giant FedEx and database powerhouse Oracle both disclosed
disappointing fourth-quarter results this week. Earnings and revenue from both
firms missed consensus expectations, and FedEx's initial FY16 outlook also fell
flat. On the conference call, FedEx executives warned they see first quarter
growth lower than consensus. Oracle blamed FX pain for its miss, but continued
to highlight the strong growth in its cloud computing business.
In M&A news, Standard Pacific Corp and Ryland Group announced a merger of
equals in a $5.2B deal. Botox maker Allergan agreed to buy Kythera
Biopharmaceuticals for about $2.1 billion, getting its hands on Kythera's
double chin treatment. CVS Health reached a deal to acquire and operate 1,660
in-store Target pharmacies for just under $2B. Medical device manufacturer
Hill-Rom Holdings acquired diagnostic and patient monitoring device maker Welch
Allyn for $2.0 billion.
The massive year-to-date surge in Chinese stocks was blunted this week, as the
Shanghai Composite gave up 13%, the index's biggest weekly slump since 2008,
and thrusting it into a technical correction in a matter of days. Shares sold
off in the absence of any significant data to set the tone and on concerns that
equities may have gone too-far-too-fast as regulators reiterated concerns about
excessive margin trading. The selloff was also partly attributed to a rise in
money market rates to two-month highs amid demand for a raft of upcoming IPOs.