Weekly Wrap

{+++} This is my favorite weekly wrap-up. Enjoy

Earnings season has passed its peak, with quarterly reports already out from the majority of the most widely anticipated companies. This week the Nasdaq broke above 2000 for first time since last October, the DJIA held above 9000 all week and the S&P500 fell just shy of the psychologically important 1000 level, hitting its high water mark at 996 on Thursday afternoon. The Commerce Department released its advance annualized Q2 GDP figure of -1%, which was better than expectations for -1.5%. Nevertheless, the economy has now been in negative territory for four quarters, its longest stretch in the red since 1947. Treasuries whipsawed throughout a week’s worth of auctions, ending the week with surge on the back of the improving GDP data coupled with lower than expected consumer consumption data for Q2. The inaugural US/China economic summit early in the week reaffirmed in yet another high-profile forum China’s emergence as a major player in the world economy. Disappointing reports from major names such as Aetna, Honeywell, US Steel and Office Depot put kept equity markets in check through most of the week. Note that approximately 70% of the S&P500 companies that have reported second-quarter results have surpassed analysts’ targets, although there is an emerging consensus that this is the fruit of beaten down expectations coupled with ruthless cost cutting. On Wednesday, PIMCO’s El-Erian reiterated his view that markets have gotten ahead of reality, calling the July rally the result of a “sugar rush.” An uncomfortably swift drop in the US Dollar on Friday sparked a $20 rebound in gold, which ended flat on the week. Over the same period, the DJIA and S&P500 each gained 0.8%, while the Nasdaq edged up 0.6%.

– On the data front, housing got a jolt of confidence as June new home sales logged a strong 11% sequential improvement, although the data also showed median prices continue to decline on both a y/y and m/m basis. The May Case-Shiller home price index registered a very small sequential increase, although this was its first move upward since July 2006, enough to prompt Robert Shiller, creator of the index, to admit it “kind of took me by surprise.” The continuing claims data caused a stir on Thursday, with the figure 100K less than expected (but still well above the critical 6M mark). Manufacturing data showed no clear trend. The June durable goods reading was mixed, with the index turning negative again after last month’s growth and the ex-transport figure sustaining May’s slightly positive trend. Consumer Confidence came in weaker than expected for a m/m decline.

– Front-month crude interrupted its climb back toward $70 this week after the weekly DoE inventory data showed a surprisingly large build in inventories, causing the contract to plummet $4 on Wednesday. Those declines were erased on Thursday after Goldman Sachs reaffirmed its $85 year-end WTI crude target and called recent weakness a temporary phenomenon. Exxon and Chevron missed earnings estimates by non-trivial margins while coming in well ahead of revenue targets. Both cited weakness in downstream results. Conoco missed on the top line and beat bottom-line estimates slightly. European firms Total, Shell and BP were ahead of analysts’ estimates across the board. Unsurprisingly, profits at all six firms were less than half last year’s levels, and down more than 70% at Chevron.

– In the first half of the week more bad news at telecoms Verizon and Sprint helped keep pressure on equity trading. Although Verizon’s quarterly results were a bit better than expected, the firm announced another round of job cuts, saying it would lay off 8,000 in the second half of the year. Sprint continued to hemorrhage monthly wireless subscribers, helping to drive an unexpectedly large quarterly loss. In tech news, Yahoo and Microsoft struck a ten-year cooperation pact, essentially a search-for-advertising swap with no payments involved, after years of negotiations. Shares of Yahoo are down nearly 15% on the week.

– By the end of last week, it looked like healthcare reform had vanished into the swamp on Capitol Hill. However, negotiations continued with the conservative Democrats (the so-called Blue Dogs) and promises of more focus on cost cuts and protections for small business helped get the bill back on track. Final votes in the House and Senate are not expected before the fall. Managed care names gained as momentum for the bill slowed, despite Aetna’s steep cuts to its 2009 guidance. Cigna and WellPoint beat bottom-line estimates but missed revenue targets narrowly.

– In other earnings, newly-minted DJIA component Travelers was largely in line with expectations, and competitor Hartford Financial Services destroyed consensus estimates but cut its full-year outlook in half. Credit card rivals MasterCard and Visa both crushed the Street’s earnings expectations, although revenue at both firms was merely in line. Honeywell’s results were in line with expectations although the company shaved the top end off its full-year earnings guidance and cut its revenue forecast significantly. Honeywell’s CEO said that economic conditions remain challenging and the company is not planning for any recovery in 2009. US Steel reported its second consecutive quarterly loss, although the shortfall was smaller than analysts had projected.

– Investors successfully downed a record $115B in Treasuries this week. Curve flattening trades dominated the markets early, with the short end and belly unsurprisingly under pressure and the long end holding up surprisingly well. The benchmark spread has now narrowed below 250 basis points. Yields have moved markedly lower from where they came into the week, especially for the 10- and 30-year. The 10-year yield has give up some 20 basis points from Monday despite 2- and 5-year auctions that spooked investors as tepid demand led to renewed concerns about declining foreign interest. The softness was brief, however. A better 7-year auction on Thursday along with the noticeable downward revision to Q1 GDP helped markets put the 2- and 5-year auctions in the rearview mirror. Prices ended the week at highs even in light of the Treasury’s quarterly refunding announcement next week. The 10-year yield has pierced 3.5% once again while the long bond has found traction around 4.3%.

– In currencies, willingness among investors to take on risk weighed upon dollar and yen sentiment for most of the week amid moments of risk aversion. The USD had a softer tone against the European and commodity pairs as the week began, with firmer Asian and European markets coupled with higher gold and oil prices hitting the USD and JPY. Positive corporate earnings reports helped raise risk appetite and the lower continuing jobless claims number only reinforced the sense that recessionary forces were moderating. After the US/China summit, China’s PBoC stated it would “unswervingly continue applying appropriate, loose monetary policy.” Chatter circulated that Merrill Lynch had raised its 2009 forecast for China’s GDP to 8.7% from 8.0%, complementing a report from a Chinese economic research body that forecasted Q3 GDP at +9.0%.

– Spats of risk aversion did develop during the week. Rumors circulated that two Chinese state banks might curb loan growth and month-end flows, slowing the velocity of money via tariffs. Then in Europe, the ECB, Bundesbank and IFO warned about the risk that banks could choke off recovery. ECB sources reiterated that the bank is concerned about the possibility of a new credit crunch and is examining both upside and downside economic scenarios for the Euro Zone. Fort its part, the IMF said the euro was overvalued by 15% versus fundamentals and urged the ECB to maintain low interest rates, insisting that the central bank had scope for more interest rate cuts.

– Currency analysts were vocal in calling for a weaker USD during the week. A Goldman Sachs analyst noted that the cyclical risks were skewed toward a weaker USD, noting that the firm believes the dollar would not rally until US demand improved. The analyst reiterated Goldman’s position that EUR/USD could test 1.45. Bank of America said the USD would likely weaken in the short term and insisted EUR/USD could retest highs from last December around 1.4719. However, BoA also stated that any absence of a USD sell-off would signal a ‘”major shift” in sentiment. As July comes to an end, the USD is at a critical point for medium-term trends. EUR/USD hit fresh eight-week highs during the course of the week, briefly testing above 1.43. Contributing to the profit-taking sentiment was the lack of market response to the increased risk appetite following the US new home sales. The IMF’s euro comments helped the USD move back into positive territory around 1.4015, but the move was short-lived as equities and oil maintained a firm tone. The Japanese economy had slipped to record levels of deflation, with core CPI falling 1.7% y/y in June. Dealers noted that the data has encouraged yield-seeking investment flows out of Japan, before taking into account the risk appetite. USD/JPY did end the week below 95 hurt by broad Greenback weakness on Friday which sent another carry trade favorite, USD/CHF below 1.07.

– Commodity-related currencies continued their firm tone. The Australian trade minister said he was not concerned about gains in the AUD, while the RBA’s Stevens was optimistic that the domestic downturn might not prove too serious. AUD/USD hit fresh 10-month highs above the 0.83 handle while USD/CAD tested below the 1.0770 area. In New Zealand, the RBNZ interest rate decision marked the key economic event in Asian trading early in the week. The bank stayed on hold at 2.50%, as expected. However, subsequent statements from Governor Bollard torpedoed the kiwi, as he called for additional easing in the quarters ahead.

Courtesy Trade The News

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