Saturday, August 2, 2014

Day Trading the News: Batten Down the Hatches there's a Storm Brewing

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The markets are ROARING this week… tons of trading opportunities and volatility that gets professional traders EXCITED for next week! 

If you missed the action… 
here’s what happened this week…

Market volatility picked up this week the array of policy and geopolitical concerns that have lurked in the background for weeks started to hit home.

The EU formally announced more biting economic sanctions against Russia over its meddling in Ukraine. Argentina entered a technical default after dragging its heels in settlement talks with holdout creditors.

In the US, the FOMC maintained the pace of QE tapering and tweaked its policy statement to acknowledge somewhat higher inflation and continuing labor market slack, although the hawkish notes garnered more attention among analysts.

The initial reading of Q2 US GDP showed economic growth came roaring back from the Q1 stumble. The July jobs report was less good than the excellent June numbers, but hardly weak. July confidence, ISM manufacturing and consumer confidence all came in much stronger than expected.

The solid US numbers contrasted with another four -year low in European July CPI data, weak Japanese employment, manufacturing and employment numbers and continuing geopolitical stress emanating from Israel and Ukraine, and the VIX index of S&P500 volatility shot up toward the end of the week, trading as highs as 17.50 on Friday, its highest level since mid-March.

During the week, the selloff in high-yield bonds accelerated, and for the month of July registered their biggest price declines in over a year, as lofty valuations and concerns about the potential for interest-rate increases drove a flight from funds that hold riskier debt.

For the week, the DJIA tumbled 2.8%, the S&P500 declined dropped 

- The FOMC adjusted its statement in two notable ways. On the dovish side, commentary on the labor market acknowledged that conditions had improved and "there remains significant underutilization of labor resources".

This is consistent with Chair Yellen's moves to watch a broader selection of employment indicators and furnish a rationale for keeping policy easy as unemployment falls toward 6% and beyond.

On a more hawkish note, the statement acknowledged that inflation "has moved somewhat closer" to target and the FOMC "judges that the likelihood of inflation running persistently below 2% has diminished somewhat," removing the previous warning about the risks of persistently low inflation.

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- The other major change in the decision was Philadelphia Fed President Plosser's dissent, in objection to the low rates for "a considerable time period" language.

In a letter of explanation released on Friday, Plosser said the job market has improved more rapidly than expected yet the Fed hasn't shifted course, warning the FOMC's language was an inappropriate characterization of the future path of policy and could limit flexibility going forward.

Dallas Fed President Fisher said that despite his opposition to some Fed policies, he felt the debate within the committee had shifted in his direction, especially given the FOMC statement language that inflation was moving closer target.

- The Q2 US GDP data was very strong, at +4.0% v +3.0%e, and the final Q1 reading was revised to -2.1% from -2.9%. Two components had an outsized role in sending the headline number higher: consumption and inventories.

Consumption bounced back from a +1.2% rate in Q1 to a healthy +2.5% rate in Q2, concentrated in durable goods spending. Meanwhile, inventories added about 1.6 percentage points to the GDP figure, which more than offsets the 1.16 point drawdown in inventories seen in Q1.

- General Motors, Ford and Chrysler all reported another strong month of sales gains in July, though the numbers ran slightly below expectations. Ford and GM sales gained 10% and 9.4%, respectively, while Chrysler sales were up 20% y/y. Ford's truck sales recovered from June's slide lower, and GM's inventory fell. A GM sales executive said strong sales should continue through the balance of the year, with plenty of pent-up demand for trucks and SUVs. Toyota and Nissan both saw 11%+ gains in sales.

- Portugal's Banco Espirito Santo is at the edge of collapse after the firm's reported a giant €3.57 billion loss for the first half of the year. The bank holding company, RioForte, and units Espirito Santo International SA Espirito Santo Financiere all sought bankruptcy protection in Luxemburg. There were reports that the Portugal government would bail out the company with public funds, just days after the Bank of Portugal said the firm would be able to resolve its capital shortfall in public markets.

- Most of the energy majors reported quarterly results this week. Exxon, Chevron, and Conoco all beat earnings expectations on solid profit growth, thanks to higher oil prices, although all three saw production fall y/y. Second-tier names Occidental and Marathon also saw similar results. Refiners Phllips 66 and Valero both missed earnings expectations thanks to a slump in refining profits, as margins fell on the higher crude prices in the quarter.

- Pharma giant Amgen crushed expectations on 23% y/y net profit growth and hiked its FY14 guidance. Amgen also said it would cut 12-15% of its workforce and restructure operations. Pfizer and Merck saw solid profit gains, although revenue at both firms was stagnant and both tightened up guidance. Regarding its failed bid for AstraZeneca, Pfizer's CEO said he was still open to M&A deals, regardless of size.

- Kellogg and Colgate missed revenue expectations and Kellogg cut its FY14 guidance outlook. Kellogg saw revenue sag in key North America markets, while overall revenue fell slightly. Clorox's result was more muted, and the firm warned FY15 revenues would be flat. Procter & Gamble reported strong quarterly results, good FY15 guidance and disclosed a plan to sell off up to 100 of its brand holdings. Card companies Visa, MasterCard, and American Express all disclosed very strong results, with solid gains in payment volumes.

- Shares of momentum names Tesla, LinkedIn, and Twitter saw strong gains post-earnings. All three had good quarters, however shares of Twitter outperformed the bunch, gaining approximately 25% in after-hours trading on Tuesday. Twitter quieted doubters with big gains in MAUs, advertising revenue, and overall performance seen in the firm's second quarter.

- Two high-profile merger deals announced this week were immediately met with skepticism. Online real estate site Trulia agreed to be acquired by competitor Zillow for $3.5 billion in stock. Critics point out that neither company is profitable and the promised cost savings from the deal would get the combined company to about breakeven. Family Dollar agreed to be acquired by Dollar Tree for $74.50/share, in a total deal valued at $9.2 billion. Activist Carl Icahn has been pushing FDO to sell itself to one of the other dollar store operators, and analysts note that both firms have flagging sales, very different business models and few cost saving synergies.

- The one-way trade in EUR/USD turned around in the second half of the week after the US jobs report. By Wednesday, the pair had dropped to eight-month lows around 1.3370, driven lower by the continuing contrast between US economic recovery and Europe's slow slide into deflation, Russia sanctions, US GDP strength and hawkish notes in the FOMC statement. However the slightly less-than-perfect jobs report on Friday gave FX traders an excuse to buy the euro, sending the pair back to the highs of the week, around 1.3445.

- In July, cable posted its worst monthly performance since March 2013, down about 1.2%. GBP/USD tested below 1.6820 briefly on Friday. Analysts suggest the recent run of softer UK economic data has shifted market expectations on the timing of a rate hike to early 2015 from late 2014. In Japan, the weaker data sent USD/JPY out to six-week highs above 103.

- The Shanghai Composite remained relatively insulated from the turmoil in the US markets, rising another 2.8% this week following last week's 3.2% leap. Beijing's targeted mini-stimulus measures have clearly hit their mark, as China industrial profits grew at the fastest pace in 5 months, and the official manufacturing PMI topped consensus by three-tenths to reach 27-month high at 51.7. Comments from the National Bureau of Stats were tempered after these data, noting the low base effect in industrial profits and also warning about the risks remaining in the smaller sectors of the economy. The HSBC manufacturing PMI, which surveys less prominent firms, did decline to 51.7 from the 52.0 flash print but still remains at an 18-month high.

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