Friday, July 15, 2016

Risk on Flows Push US Indices to New Highs com Weekly Market Update: Risk on Flows Push US Indices to New Highs
Fri, 15 Jul 2016 16:17 PM EST

For much of the week equity prices moved up aggressively as investors pointed to a variety of reasons to add risk to their portfolios. A faster than expected, relatively smooth transition of Theresa May to UK prime minister allayed some lingering Brexit fears. Speculation on the growing likelihood of aggressive BOJ and BOE stimulus later this summer coincided with a deluge of US Federal Reserve speak that indicated the Fed is still likely to keep rates at very low levels for quite some time. Finally, solid early Q2 earnings reports/commentary provided hope that US earnings growth has troughed and business on both sides of the Atlantic can withstand any negative impacts related to the UK's decision to leave the EU. The Dow and S&P each registered multiple new all-time highs as investors that have kept cash on the sidelines felt compelled to jump in, forcing valuations higher. For the week the Dow rose 2%, S&P gained 1.5% and the NASDAQ added 1.5%.

Risk-on flows also pulled money away from sovereign bond markets, sending rates higher. US Treasury supply was met with notably tepid demand early in the week spooking some bond investors. Improving US data, including some hotter than expected inflation readings, helped the US 10-year yield back up ~25 basis points to finish the week at 1.59%. The German 10-year Bund future traded without a negative yield for the first time since the UK vote.

In key data this week, analysts' eyes were on the JOLTS survey - Fed Chair Yellen's preferred gauge of US labor market health - which pulled back from the all-time high of 5.85 million job openings seen at the end of April, to 5.50 million in June. Analysts characterized the slight deceleration in openings a correction from the elevated levels of the last two months, rather than a deceleration. On Thursday, jobless claims added to the healthy labor market view, with the numbers holding steady at a three-month low of 254K, well below expectations. University of Michigan consumer sentiment came in lower so far in July's preliminary reading, as high-income consumers expressed nervousness about global events. Firming producer and consumer price figures, along with retail sales and industrial production data that topped expectations on Friday added to the view that the Fed may be able to raise rates later this year.

The Bank of England left interest rates unchanged for an 88th consecutive month, surprising markets, which had been pricing in a 75% probability of a rate cut of 25 bps to 0.25%. The British Pound surged on the news before giving back some of that ground late in the week. The policy minutes showed that most MPC member expect a rate cut at the August meeting, which will coincide with the BoE's quarterly inflation report and a press conference from Gov Carney. Also in the UK, Theresa May was named the new prime minister, after her only remaining challenger, Andrea Leadsom, pulled out of the running. PM May wasted no time in shaking up the cabinet: notably, naming Pro-Brexit MP Boris Johnson as Foreign Secretary and appointing Phillip Hammond as Chancellor of the Exchequer. The Dollar rose against the Yen late in the week on expectations for the launch of Japan PM Abe's promised big stimulus package after his party was victorious in Sunday's parliamentary election.

JPMorgan, the first big US bank to report second quarter results, did quite well in the three months to June. Net income declined very slightly, although EPS and revenue beat expectations. FICC trading revenues were up 35% y/y, widely beating consensus expectations. Shares of Alcoa saw gains after reporting a beat on top and bottom lines. The materials conglomerate affirmed global aluminum demand growth expectations and forecast improvement in H2 and 2017 on ramp-up of capacity. Data storage firm Seagate raised its guidance on Monday, citing demand for its HDD product portfolio, and Western Digital lifted in sympathy. Nintendo was up nearly 70% on the week on the surprising popularity of its new mobile game, Pokemon Go.