Friday, June 26, 2015

Market Week Wrap-up Weekly Market Update: Greek Standoff Continues Greece, Supreme Court Upholds Obamacare
Fri, 26 Jun 2015 16:04 PM EST

Another week passed without resolution of the Greek situation, which continues to be the central drama in global markets. Bond markets remained remarkably calm despite the standoff with Athens, and Friday's session saw US Treasury and German Bund sellers push yields back up towards recent highs. Generally positive US economic data along with Fed commentary supported the notion the FOMC will be able to move on rates later this year. The US Dollar index gained more than 1.5% on the week while the EUR/USD finished just above the 1.1143 50-day moving average for the first time in nearly one month. US equities moved lower after last week's gains, while European stocks were very choppy on the continuing game of Greece headline roulette. The Shanghai Composite lost another 10.5% this week, putting it about 19% off its most recent high. For the week, the DJIA lost 0.4%, the S&P500 dropped 0.4% and the Nasdaq fell 0.7%.

On Monday, markets reacted exuberantly to reports the Europeans had made a breakthrough that could lead to a last-minute deal with Athens, sending the CAC and the DAX up over 3% each on the day. The Greeks apparently offered concessions to gradually move the retirement age to 67 and increase VAT taxes on certain items, in exchange for an extension of the current bailout and a possible third bailout. Like many prior breakthroughs, it didn't last. By Wednesday, the Greeks were saying the Europeans had rejected their concessions while the Europeans said the Greeks had rejected their offers. Meanwhile, the ECB twice hiked ELA funding for Greece early in the week (making four increases in the last week and a half), to a total of approximately €89B, but notably held off from raising the facility in the latter half of the week as negotiations soured. Hard negotiations led to hard feelings and both sides invoked the word "blackmail" to describe the others' demands. German Chancellor Merkel is said to have told colleagues that this weekend was the final chance for Greece, with a deal required before the market opened next Monday. Other European officials, including the Eurogroup chief Dijsselbloem were more upbeat, still seeing a deal possibly coming together at the meeting of financial ministers scheduled for Saturday afternoon.

European June flash PMI data provided more evidence of the accelerating recovery on the Continent. The Markit Eurozone manufacturing PMI hit rose slightly to 52.5, its highest level in 14 months, while the composite PMI, which covers both services and manufacturing, came in a 49-month high. Based on its survey, Markit expects Q2 Eurozone around +0.4%, equal to Q1 GDP. The German and French flash PMIs both saw improvements, with the composite index for France expanding to 53.4 against May's 52.0, and the composite index for Germany rose to 54.0 from 52.6 in May.

The third and final reading of US Q1 GDP saw a decent upward revision but still left the figure in contraction territory. The advance reading was +0.2%, the preliminary figure was -0.7% and the final number out on Wednesday was -0.2% (the year ago final figure was -2.1%). With Q1 in the can, the May PCE and durables reports provided color on the progress of Q2. Core PCE - the Fed's preferred measure of inflation - was +1.2%, right in line with expectations and the April reading, but still well short of the Fed's 2.0% target. The real bright spot was the personal spending component, which saw its biggest gain since August 2009. The May durable goods report was mixed, with the headline reading a bit worse than the revised April figure (-1.8% v -1.5% m/m), dragged lower by more weak aircraft orders. Ex-transports, the May figure was up slightly m/m, while the core capital goods component returned to growth (+0.4% v -0.3% m/m).

Moderate Fed Governor Powell acknowledged the Q1 slowdown in the US economy even as there are more recent signs of wage increases in the labor market. According to Powell, rate hike conditions could be satisfied as soon as September, making for a 50/50 chance of a rate hike as soon as September. He said markets are starting to bake in a path of gradual rate hikes, making it less important to focus intently on when rate liftoff occurs.

May US home sales were very strong, bouncing higher from the somewhat mixed April data. Existing home sales rose to 5.35M, topping the previous cycle high of 5.31M seen in July 2013, just prior to the taper tantrum decline. New home sales were even stronger, rising to their highest rate since February 2008. Note that the supply of new homes was unchanged at 206K and remains less than half of what it was at the height of the housing boom. Homebuilder Lennar reported second-quarter results on Wednesday, disclosing orders, deliveries and a backlog that were up by double-digit percentages.

Obamacare survived a major challenge as the US Supreme Court ruled 6-3 to uphold disputed subsidies language in the King v. Burwell case. Chief Justice John Roberts authored the majority opinion, writing "A fair reading of legislation demands a fair understanding of the legislative plan." The majority decision stated that the broader "context and structure" of the act intended to allow tax credits under any exchange created by the law, whether state or federal. Hospital and managed care stocks surged on the ruling, many rising over 10%.

The same stocks got another boost as the merger waltz moved on to the healthcare industry. Cigna received and rejected a $47 billion takeover offer from Anthem, valued at $184/share, an 18% premium to the firm's prior closing price. Cigna called the bid "inadequate" and said it was skewed heavily in favor of Anthem shareholders. There were press reports that Aetna was nearing a deal to acquire Humana in cash-and-stock deal. Shares of animal healthcare specialist Zoetis went on a rollercoaster ride after a press report said that it was approached by Valeant, which was subsequently shot down by CNBC saying that Valeant was not likely to pursue a deal. Elsewhere, Potash offered to acquire German fertilizer firm K+S, although there were no concrete details disclosed by the firms about terms. Press reports suggested K+S thought Potash's offer in excess of €40/share was too low.

IAC/InterActiveCorp said it was planning an IPO of its unit, which also includes popular dating service Tinder. The new group will sell less than 20% of the company in the transaction, which is expected to be completed in the fourth quarter. Netflix shares reached new all-time highs after declaring a 7 for 1 stock split, but then hit some static after Carl Icahn announced he had liquidated the remainder of his shares, netting a $1.6B profit.

The swoon in China markets continued with another outsized 7.4% Friday decline, taking Shanghai Composite down over 6% for the week to a 6-week low. The index is now down nearly 20% from its peak. The active IPO pipeline remains a popular culprit among analysts, with another 28 listings this week estimated to freeze up some CNY1.5T in investment funds. Incoming economic data hardly offered much relief, as the HSBC flash manufacturing PMI implied a fourth straight month of contraction amid more rapidly deteriorating employment conditions. The PBoC made a feeble attempt to stem the tide, resuming reverse repo liquidity injections through open market operations for the first time in nine weeks with a CNY35B repurchase. The annual round of US-China Strategic and Economic Dialogue negotiations also concluded this week with a promise by Beijing to limit FX interventions to instances "necessitated by disorderly market conditions", as opposed to last year's much more vague pledge to reduce interventions "as conditions permit".

In contrast, Japan investors continued to cheer policymakers' commitment to open-ended QQE, sending Nikkei225 to an 18-year high near 21,000 level. The rally is particularly impressive considering that USD/JPY has spent its second straight week trapped in ¥122.50-124.50 range in spite of a steady rise in US rates. Servings of Japan economic data also appeared benign to outright "goldilocks" - unemployment rate held at a multi-year low of 3.3%, household spending rose by much higher than expected 4.8%, while inflation further justified a united BOJ front at a 2-year low of 0.5%. Japan's quarterly Tankan figures, along with wage inflation and retail spending data, are on tap for next week.