Saturday, October 11, 2014

Weekly Trading Recap: Volatility rocks the 2nd week of October!

The second week of October was some of the most exciting price-action we have seen in 2014, with markets making the biggest up-and-down days of the year!

If you’ve been living under a rock the past 7 days, here’s your opportunity to catch up on the action that shook the markets this week!

Volatility shook global markets this week, severely testing the long equity rally.
Wednesday saw the biggest one-day gain of the year in the S&P500 and Thursday marked the biggest decline in the index since April.

The VIX volatility index moved sharply higher, topping 20 for the first time since February. The downside ramp got underway thanks to disastrous German industrial data published on Monday and Tuesday. German August factory orders data declined 5.7% m/m (the biggest m/m drop since early 2009), led lower by a big slide in overseas orders. German August industrial production declined 4% m/m, much more than expected. 

In addition, the IMF cut its 2014 global growth forecast to from +3.4% to +3.3% and its 2015 forecast from +4.0% to +3.8%. The DJIA and S&P500 were down 2.5% a piece by Wednesday morning, and participants read deeply between the lines of the FOMC minutes to uncover the possibility of the Fed holding off on rate hikes longer, driving a sharp reversal.

The sugar high didn't last, and markets closed at the lows of the week (or much lower, in the case of the Nasdaq, which is right at its 200-day moving average).

Ebola fear spread to new corners of the globe all week - the first confirmed transmission of the virus outside of Africa struck a nurse in Madrid - but nearly all the reports were false alarms.
For the week, the DJIA dropped 2.7%, the S&P500 fell 3.1% and the Nasdaq lost 4.5%, the worst week for the tech index since May 2012.
After the cash close on Friday, S&P futures saw another spike in volatility around the 1900 mark, rallying 6 handles before falling nearly 10 points in the final minute of index futures trade to close on the lows, portending more volatility in stock trading Monday, when the bond market is closed for Columbus Day.
The FOMC minutes were the real catalyst for Wednesday's short-lived rally, although the absence of any surprises in the report may have been the real good news. Many observers were drawn to comments in the minutes about the possible downside risks from dollar appreciation and weak global growth, although more savvy analysts pointed out that Fed Chair Yellen had also cited these as possible downside risks at her post-decision press conference at the September FOMC meeting.
While it is true that explicit comments about the impact of dollar FX movements are somewhat rare for Fed officials, it's also worth noting that the moves in the dollar have been rather sharp recently.

On Thursday, Fed Vice Chair Fischer said that the central bank must take into account the impact of the dollar on aggregate demand, and also said the issue would be discussed at the next FOMC meeting.

As portended last week, the IMF cut its 2014 global growth forecast to from +3.4% to +3.3% and its 2015 forecast from +4.0% to +3.8%, citing eurozone recession risks and emerging market slowdown. The outlook for the global economy has darkened and the IMF sees a more than one-in-three chance the eurozone will slide into its third recession since the financial crisis. The IMF maintained its China 2014 GDP forecast at +7.4% (nearly in line with China's official 7.5% forecast), and raised the US 2014 forecast from +1.7% to +2.2%.
On Thursday, WTI crude was drilled down to $83.55, its lowest level since last June and Brent tested lows last seen in late 2011, near $88/barrel. The slide continues to be driven by oversupply concerns and the possibility of flagging demand from battered economies, exacerbated by dollar strength. More proximate catalysts included the weekly API inventory report, which showed the biggest weekly build in crude inventories since April. Further analysis regarding Saudi Arabia's price reductions last week suggested the moves were aimed at boosting refinery margins in Asia and were not the opening move in an OPEC price war. Additionally, there was a report that crude priced below $90 a barrel would render drilling for oil in some shale formations uneconomical, starting with the Bakken region.

The crisis in Hong Kong dimmed considerably after the authorities in the enclave agreed to hold talks on Friday with student protestors over changes to the local election laws that had sparked the unrest. Just a day before talks were to begin, Hong Kong Chief Secretary Carrie Lam cancelled the negotiations claiming they had been undermined by attempts to start a new civil disobedience campaign to pressure the Hong Kong anti-graft agency to probe a payment of $6.4M to Hong Kong's leader C.Y. Leung. By Friday, large crowds of students were back out on the streets of Hong Kong.

Alcoa started the earnings season off on a positive note, reporting strong third-quarter earnings, boosted by higher aluminum prices. Both earnings and revenue widely topped expectations - EPS gained 70% y/y - while margins and operating income were up significantly. Most components of the firm's FY14 outlook were unchanged, although it notably brightened its forecast for North America commercial transport market.

Samsung Electronics disclosed ugly preliminary third quarter results. Samsung warned operating profits would fall 60% y/y as the company's smartphone sector struggles to cope with increased competition. Sales guidance was down more than 20% y/y. Mobile devices are the key driver of the company's profits, and its second quarter profit fell 20% y/y for much the same reasons.

Semi names were short circuited on Friday after Microchip Technology reportedly preliminary second quarter revenue results that fell short of both consensus expectations and the company's own guidance. The company said September is usually strong, but this year expected sales did not materialize. The revenue miss was led by China, where the September quarter is traditionally the strongest. Microchip CEO Sanghi said "We believe that another industry correction has begun and that this correction will be seen more broadly across the industry in the near future."

Shares of Sears Holding declined 13% this week on reports that insurance firms were cutting coverage of Sears trade credits, prompting at least one suppler to halt shipments to the company. Sears would neither confirm nor deny the report, and emphasized its significant financial flexibility. Elsewhere in the annals of insolvency, GT Advanced Technologies filed Chapter 11 bankruptcy. The firm is exiting its sapphire manufacturing operation after a failed effort to produce the material for Apple's smartphone screens.

Activist investors made a splash this week in shares of Darden and Apple. Carl Icahn renewed his call for Apple to launch a $100B tender offer for shares, as part of a long, rambling letter to Tim Cook that read mostly like fan fiction. Icahn said he had not sold a single share of his stake. Just a month after releasing its infamous slide deck detailing Olive Garden's corporate and culinary failures (too many breadsticks, no salt in the pasta pots), activist fund Starboard won its proxy fight with Darden and replaced all 12 of the company's directors with its own nominees.

After closing in on 1.2500 last week, the dollar eased up through Thursday morning, with EUR/USD trading almost back to the 1.2800 handle. The pair turned around and closed out the week around 1.2620. The 1.2400 level is a key psychological point for EUR/USD, as it was there that ECB President Draghi made his famous "whatever it takes" pledge back in July 2012.

The monetary policy statement from the Bank of Japan reiterated its overall economic assessment of "moderate recovery as a trend", but also lowered its view of industrial production. The BOJ cited inventory adjustment among the reasons for output "showing some weakness". One of the BOJ's more dovish voters, Sayuri Shirai, also added a dissent on the inflation component of the statement, calling for greater acknowledgement of an increasing number of price indicators turning flat. The dissent is symbolic in that this week's decision serves as a precursor to the late-October meeting, when the central bank will offer its semi-annual revisions to near-medium term projections for growth and inflation. Also of note in Japan, the government's economic officials have turned more mixed on the rapid depreciation of the Yen, citing more limited positive impact on exports against the negative implications for some of the domestic industries. USD/JPY has certainly heeded that change in sentiment, falling by its biggest weekly margin in over a year.

The Shanghai Composite returned from an extended break and finished the week flat. The mainland property sector remained supported by the latest PBoC measures to ease eligibility criteria for preferential "first home mortgages", but the focus next week will turn to September trade, lending, and inflation data. As Beijing prepares for the 4th party Plenum, the government's official 7.5% GDP target for 2014 is coming into question. Just this week, the World Bank lowered its China 2014 growth estimate to 7.4%, matching the forecast maintained by the latest IMF projections. China Academy of Social Sciences think tank also warned that 2014 GDP could slow to 7.3%, as the government accelerates "various reforms to move toward healthier growth." The latest Q3 GDP figures are scheduled to be released later this month on October 20th.

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