Saturday, June 14, 2014

Weekly Recap | Markets Churn as violence in the Middle-East escalates

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BIG NEWS this week shocked the world and ROCKED the markets we trade in our Live Trade Room.  We had another exciting week of trading opportunities with members at

Here’s what happened this week around the world!


- Global equity markets retreated from recent highs this week as a risk-off tone of consolidation dictated sentiment.

On Tuesday, the World Bank cut its 2014 global growth forecast from 3.2% to 2.8%, citing weaker performance in the BRIC nations, and cut US 2014 GDP outlook to 2.1% from 2.8%.

That same day, Iraq displaced Ukraine as the world's number one geopolitical flashpoint as an Islamist militia deeply involved in the Syrian civil war struck a destabilizing blow against Iraq, seizing its second largest city and raising the prospect of a wider conflict in the Middle East.

On a more minor note of political turmoil, House Majority Leader Eric Cantor was upset in a primary race against a no-name Tea Party candidate, promising more dysfunction in Washington, DC. 

No amount of positive economic news offset these developments: China's May numbers were largely flat or positive, and Japan's final Q1 GDP was excellent. The BoE chief Carney hinted at early tightening thanks to strong UK performance. For the week, the DJIA dropped 0.9%, the S&P500 declined 0.7% and the Nasdaq fell 0.3%.

- Events in Iraq stunned the world this week, as the militia Islamic State in Iraq and the Levant (ISIS), which has been fighting in the Syria conflict and in northern Iraq for years, rapidly advanced on and seized Mosul, Iraq's second largest city. Tens of thousands of Iraqi army soldiers dropped their weapons and fled without firing a shot, casting doubt on the morale and loyalty of the entire armed forces. 

After taking Mosul, ISIS advanced rapidly toward Bagdad, overrunning several more cities along the way. The Kurds in northern Iraq secured Kirkuk and its surrounding oil infrastructure after Iraqi army units abandoned the city. With the army failing to put up any resistance, Grand Ayatollah Sistani issued a fatwa calling on Shiites to join the armed forces en masse to fight ISIS, ratcheting up the prospect of an all-out sectarian war. President Obama said his national security team would prepare a range of options to assist Iraq, but would not consider sending ground troops. 

Obama's unhurried tone left little question that the Administration would prefer to see Iraq solve its own problems. WTI crude came into the week around $102.70 and surged to $106.70 by Friday.

- BoE Governor Carney began positioning the BoE to join the Fed in the policy exit club this week. Just as the World Cup was kicking off, Carney gave a speech in which he warned that rate hikes might come sooner than expected. Carney said the bank had no preset course for raising rates and clarified that the timing of hikes would be entirely data dependent. The UK has already seen a string of improving economic data and the BoE has been ahead of the curve on normalizing policy, but Carney's remarks still came as something of a surprise. Following the speech analysts suggested that expectations for the first rate hike have moved to late 2014 from the first quarter of 2015. The BoE June meeting is next week.

- Two big Fed doves made comments this week that could be seen as conceding the time was drawing near to start tightening policy. Bullard said the Fed was closer to achieving its policy objectives than it has been in most times since 1960 and observed that the economy is more normal than it has been for five years. The potential for GDP grow in excess of 3% in the final three quarters of the year would "adjust rate-liftoff timetable." He also warned that the last tightening cycle, in 2004-06, was too methodical and failed to respond to economic developments. Rosengren said he would be in favor of raising reverse repos and interest on excess reserves when the time came for tightening. Interestingly, he also said he would favor a seamless continuation of tapering to reduce the Fed's balance sheet. And while attention was focused elsewhere, one of Janet Yellen's favorite economic indicators blew out expectations. The April JOLTs job openings report was +4.5M v +4.0Me, providing more evidence that the labor market is truly healing. The pre-recession high was +4.7M in March 2007. The prior month's number was revised up to +4.2M from +4.0M. 

- Airlines had a very turbulent week after the World Bank cut global growth forecasts, the Iraq situation sent oil higher and Lufthansa and Aer Lingus cut guidance. Lufthansa cuts its FY14 profit forecast to €1.0B from the €1.3-1.5B outlook offered at the beginning of May, warning that it had negative pricing in May due to stiff competition from low-cost carriers. Price weakness and overcapacity on North Atlantic routes impacted the airline's cash cow premium seats. Aer Lingus's problems stem from ongoing cabin crew strikes, which have impeded operations. Aer Lingus warned that profits would fall 10-20% y/y in 2014. At one point, shares of American Airlines were down as much as 14% on the week before recovering a bit. Delta dropped 7% on the week and United was down 12%, with domestic-focused carriers Southwest and JetBlue down 5% a piece.

- Tech had some brighter news thanks to Intel raising Q2 and FY14 guidance on higher PC unit volume, perhaps indicating an IT refresh is taking hold. Meanwhile, Tesla made the bold move of opening its electric motor patents to other firms in an effort to springboard wider adoption of its clean energy vehicle standards.

- Allergan rejected Valeant's latest offer and provided a comprehensive rebuttal of not just the logic behind Valeant's offer but also the company's entire business model. Valeant raised the cash component by $13.70 to $72 and left the stock component at 0.83 shares of Valeant stock. The revised offer valued the deal around $180/share or about $54B in total. Allergan responded with a scathing presentation that questioned the sustainability of Valeant's entire business model. According to Allergan, Valeant's unsustainable model relies on serial acquisitions and R&D cost reductions, as opposed to top-line revenue growth and operational excellence.

- In other deal news, Tyson Foods won the contest for Hillshire Brands with its $63/share cash offer, making a total deal valued at $8.55B, including Hillshire's outstanding debt. Pilgrim's Pride refrained from raising its $55/share offer over the weekend, and the company later said it was still on the hunt for a big processed food acquisition. Merck has a deal in hand to buy biotech name Idenix Pharmaceuticals for $24.50/share, in a total deal valued at $3.9 billion. The deal gives Merck a good position in the hepatitis C area, where Idenix has promising portfolio of drug candidates. CNBC reported that Merck paid a huge premium for the company, following a bidding war with Johnson & Johnson and AbbVie. Priceline agreed to buy dining reservation site OpenTable for $2.6 billion in cash. Priceline has been looking to extend its business beyond travel, and OpenTable has 15 million customers who book reservations across 31K restaurants a month.

- In FX trading, major pairs were in consolidation mode after last week's ECB rate cut and US May payrolls. The greenback tried to hold onto its slight gains with dealers noting that yield spread between two-year yields on USTs and German bunds were at their widest since 2007 at one point, EUR/USD saw strong resistance ahead of big option barriers at 1.3500 which could prove tough to break. The level corresponded to last week's post-ECB decision low. EUR/JPY closed out the week below its 200-day moving average around 138.70. The key level was tested in late May but sustained moves below the level on a closing basis have not held since just before Japan PM Abe's electoral victory in summer 2012. This time the break could be for real. GBP/USD was approaching the 1.70 handle following Carney hawkish message. With rate hikes coming even sooner, sterling should strengthen further. Note that the 1.7050 level has been a pivotal trading point over the past eight years.

- Japan put out final Q1 GDP figures that were stronger than expected. The capital investment component stood out with a 7.6% q/q rise, above the 4.9% prelim and 4.6% estimate, bringing the overall figure to 1.6% and 6.7% annualized. Later in the week, the BOJ policy statement maintained its economic assessment for the 11th consecutive meeting but raised its view on overseas economies. BOJ Governor Kuroda's press conference reflected the recent upbeat GDP and CPI data, noting the impact of the sales tax hike has been within expectations and forecasting a summer recovery following the Q2 contraction. The Nikkei225 ended the week flat after an early selloff.

- China released the bulk of its economic data for May to little fanfare despite the generally robust set of numbers. Retail sales growth hit a four-month high of 12.5%, new loans of CNY870B beat estimates by a large margin, M2 money supply reached a 5-month high, while the CPI recovered from multi-month lows amid a large increase in food prices. Markets also overlooked the surprising drop in imports component of the trade figures out early in the week, with the overall trade balance hitting a 5-year high of $35.9B. Much of the focus fell on the details of the 50bp RRR cut by the PBoC on Monday as part of a "targeted stimulus" aimed at reviving credit for smaller enterprises and the rural segment of the economy.

- Down under, Australia saw its first negative net employment change in four months with all of the losses coming in the part-time sector. In fact, total hours worked in May saw the biggest monthly increase in over a year, which largely made up for participation rate falling to an eight-year low of 64.6%. The New Zealand central bank raised its benchmark rates by another 25bps to 3.25%, and the accompanying statement was much more hawkish than expected. Governor Wheeler did not see the recent strength in NZD and dairy price declines as sufficiently detrimental, generally maintaining the bank's outlook for 90-day bill rates through 2016. Fixed income markets repriced the probability for a July decision in favor of another rate hike, while NZD/USD hit a 4-week high near the $0.87 handle.

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