TradetheNews
06-18-2011, 08:29 AM
- Trading on global equity markets was highly volatile this week thanks to a round of soft June US manufacturing data and fears that European players had lost control of the Greek sovereign debt crisis. The June Empire Manufacturing and Philadelphia Fed reports were much weaker than expected and the former turned negative for the first time since last fall. Recall that it was poor showings in the May regional Fed surveys that helped trigger the recent sell off in stocks. Domestic political turmoil in Greece riled markets, as the position of the Greek government began to look very shaky indeed and European partners continued to quarrel over the terms of a new bailout plan. Contagion fears picked up again as analysts warned about the potential for a European 'Lehman moment' and discussed the impact of a potential default could have on the global banking system. Emblematic of market stress levels rising, the VIX index moved above the key 20 level for the first time since mid March, spiking above 24 on Thursday. Tension eased on Friday after the Germans backed away from mandatory private bondholder participation in a second Greek bailout, stemming the slide. The ailing world economy and a weaker euro crushed crude prices, as the front-month WTI contract came very close to its 2011 lows below $92 on Friday afternoon. The S&P500 avoided a seventh straight down week, finishing the week higher by less than 0.1%, while the Nasdaq continued to languish, losing 1.0%. The DJIA eked out a small gain this week, up 0.4%.
- Softness in US economic data has cast a shadow on the US economic recovery, and this week a handful of mid-level US corporations offered cloudy commentary that suggests the conditions driving the soft patch are having an impact on companies. Manufacturer Owens Illinois said that it expects Q2 earnings will be down from the prior year period due to higher costs, even as it continues to see global shipment levels higher on a y/y basis. Motor home manufacturer Winnebago released terrible Q3 results: earnings missed expectations; margins fell, total deliveries declined and the firm's backlog shrank. Winnebago's CEO warned that the company's North American business was weakening significantly. Steel Dynamics cut its profit outlook for Q2 due to the big hikes in the cost of scrap steel that have accompanied the overall commodity price rises, coupled with weaker demand. Scott's Miracle-Gro cut its FY11 profit guidance, citing the challenges of unfavorable weather in most of the United States. The capstone on a bad week of earnings was Research-In-Motion's horrendous Q1 report, slashing guidance for the rest of the year as Blackberry smartphone sales lost more ground to iPhone and Android. RIM shares lost 20% on Friday as shareholders fled the stock and Wall Street hit it with a raft of downgrades.
- The recent lull in merger news was broken by a pickup in M&A flows this week, including a flurry of deal announcements on Monday. Natural gas distributor Southern Union is getting taken out by Energy Transfer Equity for $7.9B. Transatlantic Re and Allied World agreed to a $3.2B merger of equals. VF Corporation signed a deal to acquire Timberland for $43/share in cash, in a deal worth around $2B. Wendy's/Arby's said it would sell off Arby's to private equity name Roark Capital Group for $430M. In Canada private equity firm the Maple Group launched its C$3.7B hostile offer for the Toronto Stock Exchange, looking to convince shareholders it offers a better deal than the LSE.
- Government bond markets whipsawed this week as investors continually reassessed their risk tolerance as economic data highlighted the soft patch and a deluge of Greek headlines fueled swings in sentiment. The US 10-year yield traded in a 20-basis point range before finishing the week just below 2.93% after making a fresh 2011 low. The US 2-year yield is hovering near all time lows below 0.4%.
- There were a few positive developments in the Greece story early on in the week. Euro zone finance ministers tried to hammer out a plan to keep the country from defaulting and the Greeks finalized an €80B loan extension that was discussed at the March EU summit, pushing EUR/USD out to 1.4500 or so. Contagion fears exploded on Wednesday after Moody's put three French banks on review due to their exposure to Greece, and a Spanish debt auction undersold its target. With rioters back out in the streets of Athens in force, Greek PM Papandreou tried and failed to strike a deal with the opposition to form a national unity government in order to rally flagging support for critical reforms. EUR/USD bottomed out around 1.4100 on Thursday, as Greek political in-fighting appeared to threaten a new aid agreement. The situation improved on Friday as chatter circulated that an agreement between the EU and the IMF would be announced soon. German Chancellor Merkel retreated from earlier demands that private bondholders be forced to shoulder a substantial share of a potential second Greek rescue package, opting for a form of optional debt exchange. EUR/USD closed out the week not far from where it began on Monday, around 1.4350.
- In other FX trading, the Swiss Franc maintained a firm tone and continued to hit fresh all-time highs against the Euro. The EUR/CHF breeched the 1.20 handle to trade at 1.1944 on Thursday, before retracing a bit on Friday. GBP/USD was plagued by soft economic data, including the biggest rise in unemployment claims in two years and weaker-than-expected retail sales data. GBP/USD slumped to test 1.6100 where it was displaying a three-month H&S top pattern neckline. The technical target of a sustained break would be 1.54 in the pair, although it managed to hold on towards the end of the week.
- Monthly economic metrics from China offered only temporary relief to equity markets in Asia. May CPI was in line with forecasts at 5.5% - a near three-year high, but also below some of the more dire predictions floated by government research officials. In turn, industrial production reflected strength in May imports reported last week, coming in two ticks above consensus at 13.3%. Benign Chinese data renewed chatter of a "soft landing" on the mainland, helping markets shrug off another 50bps reserve requirement ratio (RRR) hike to 21.5% by the PBoC. Investors still remain on edge for a tightening in key one-year rates expected by many to take place before the end of June, preserving the pattern of rate hikes every other month. Despite the post-data early week bounce, the Shanghai Composite finished the week at its lows below 2,650 - the lowest finish since late September of 2010 and 14% off the 2011 peak.
- In Tokyo, the Bank of Japan upgraded its assessment of the Japanese economy for the first time since the mega-quake while also announcing a new ¥500B credit line to growth industries. Additional stimulus comes on top of the ¥4T in near-zero interest rate loans offered by the central bank in the past nine months. Japan also saw continued progress in recovery from the March disaster, as Industry Minister Kaieda prepared to give the green light to operations at 35 nuclear reactors idled for a safety review following the earthquake. In addition, the president of Toyota indicated full global production would be restored by next month, well ahead of late-fall target initially estimated.
- Softness in US economic data has cast a shadow on the US economic recovery, and this week a handful of mid-level US corporations offered cloudy commentary that suggests the conditions driving the soft patch are having an impact on companies. Manufacturer Owens Illinois said that it expects Q2 earnings will be down from the prior year period due to higher costs, even as it continues to see global shipment levels higher on a y/y basis. Motor home manufacturer Winnebago released terrible Q3 results: earnings missed expectations; margins fell, total deliveries declined and the firm's backlog shrank. Winnebago's CEO warned that the company's North American business was weakening significantly. Steel Dynamics cut its profit outlook for Q2 due to the big hikes in the cost of scrap steel that have accompanied the overall commodity price rises, coupled with weaker demand. Scott's Miracle-Gro cut its FY11 profit guidance, citing the challenges of unfavorable weather in most of the United States. The capstone on a bad week of earnings was Research-In-Motion's horrendous Q1 report, slashing guidance for the rest of the year as Blackberry smartphone sales lost more ground to iPhone and Android. RIM shares lost 20% on Friday as shareholders fled the stock and Wall Street hit it with a raft of downgrades.
- The recent lull in merger news was broken by a pickup in M&A flows this week, including a flurry of deal announcements on Monday. Natural gas distributor Southern Union is getting taken out by Energy Transfer Equity for $7.9B. Transatlantic Re and Allied World agreed to a $3.2B merger of equals. VF Corporation signed a deal to acquire Timberland for $43/share in cash, in a deal worth around $2B. Wendy's/Arby's said it would sell off Arby's to private equity name Roark Capital Group for $430M. In Canada private equity firm the Maple Group launched its C$3.7B hostile offer for the Toronto Stock Exchange, looking to convince shareholders it offers a better deal than the LSE.
- Government bond markets whipsawed this week as investors continually reassessed their risk tolerance as economic data highlighted the soft patch and a deluge of Greek headlines fueled swings in sentiment. The US 10-year yield traded in a 20-basis point range before finishing the week just below 2.93% after making a fresh 2011 low. The US 2-year yield is hovering near all time lows below 0.4%.
- There were a few positive developments in the Greece story early on in the week. Euro zone finance ministers tried to hammer out a plan to keep the country from defaulting and the Greeks finalized an €80B loan extension that was discussed at the March EU summit, pushing EUR/USD out to 1.4500 or so. Contagion fears exploded on Wednesday after Moody's put three French banks on review due to their exposure to Greece, and a Spanish debt auction undersold its target. With rioters back out in the streets of Athens in force, Greek PM Papandreou tried and failed to strike a deal with the opposition to form a national unity government in order to rally flagging support for critical reforms. EUR/USD bottomed out around 1.4100 on Thursday, as Greek political in-fighting appeared to threaten a new aid agreement. The situation improved on Friday as chatter circulated that an agreement between the EU and the IMF would be announced soon. German Chancellor Merkel retreated from earlier demands that private bondholders be forced to shoulder a substantial share of a potential second Greek rescue package, opting for a form of optional debt exchange. EUR/USD closed out the week not far from where it began on Monday, around 1.4350.
- In other FX trading, the Swiss Franc maintained a firm tone and continued to hit fresh all-time highs against the Euro. The EUR/CHF breeched the 1.20 handle to trade at 1.1944 on Thursday, before retracing a bit on Friday. GBP/USD was plagued by soft economic data, including the biggest rise in unemployment claims in two years and weaker-than-expected retail sales data. GBP/USD slumped to test 1.6100 where it was displaying a three-month H&S top pattern neckline. The technical target of a sustained break would be 1.54 in the pair, although it managed to hold on towards the end of the week.
- Monthly economic metrics from China offered only temporary relief to equity markets in Asia. May CPI was in line with forecasts at 5.5% - a near three-year high, but also below some of the more dire predictions floated by government research officials. In turn, industrial production reflected strength in May imports reported last week, coming in two ticks above consensus at 13.3%. Benign Chinese data renewed chatter of a "soft landing" on the mainland, helping markets shrug off another 50bps reserve requirement ratio (RRR) hike to 21.5% by the PBoC. Investors still remain on edge for a tightening in key one-year rates expected by many to take place before the end of June, preserving the pattern of rate hikes every other month. Despite the post-data early week bounce, the Shanghai Composite finished the week at its lows below 2,650 - the lowest finish since late September of 2010 and 14% off the 2011 peak.
- In Tokyo, the Bank of Japan upgraded its assessment of the Japanese economy for the first time since the mega-quake while also announcing a new ¥500B credit line to growth industries. Additional stimulus comes on top of the ¥4T in near-zero interest rate loans offered by the central bank in the past nine months. Japan also saw continued progress in recovery from the March disaster, as Industry Minister Kaieda prepared to give the green light to operations at 35 nuclear reactors idled for a safety review following the earthquake. In addition, the president of Toyota indicated full global production would be restored by next month, well ahead of late-fall target initially estimated.