Europe Overshadows S&P 2000

- US stocks began the week on another strong note aided by sentiment out of Europe. The S&P crossed 2000 for the first time ever during Monday's session. Weekend analysis of Mario Draghi's Jackson Hole speech suggested the ECB may be even closer to enacting more stimulus measures. In that speech he noted that market based inflation expectations fell strongly in August, which opened the door to speculation the ECB was ready to act perhaps as early as next week's meeting. European government bond yields plunged to fresh record lows on hopes a healthy dose of QE is just around the corner. Only solidifying those expectations was more tepid economic data from Germany, leaving many to wonder if the Russian sanctions have caused Europe's growth engine to stall. August European CPI readings showed some stabilization at what are already low levels while readings in Belgium and Spain indicated acceleration to the downside. The 10-year Bund yield dropped below 0.90% to a new lifetime low. By Thursday the EONIA fix settled in negative territory for the first time. Despite what was a generally a rosy picture painted by the US data, the 10-year Treasury yield hit 2.32% which was only a few basis points from fresh lows for the year. For the week, the S&P500 gained 0.7%, the DJIA added 0.6%, and the Nasdaq rose 0.9%.

- Geopolitics, the Ukraine specifically, took center stage once again especially through the back half of the week. Safe haven flows were seen exacerbating the move lower in bond yields and serving as a headwind to stocks. Any goodwill that was exhibited in the handshake between Presidents Putin and Poroshenko on Tuesday quickly dissipated by Wednesday when reports began surfacing that Russian regular army troops were on the ground in parts of Southern Ukraine helping separatist fighters. Poroshenko confirmed as much in a press conference on Thursday noting the situation on the ground had changed significantly. Talks of another round of sanctions started to brew and rising tensions could be seen in the rhetoric from Western officials that followed, demanding that Russia cease its military "incursions." The Russian Ruble fell to a new all-time low against the dollar, past 37. The last time it traded near this level was when Russia seized Crimea this past spring. Separately, Friday the UK raised its terrorist threat level on concerns about hundreds of British citizens fighting alongside ISIS in Iraq and Syria could return home intent on wreaking havoc.

- The headlines coming out of Europe largely overshadowed the bulk of the US economic data which showed the rebound in US economic activity is picking up. At 4.2%, Q2 annualized GDP beat consensus expectations by 0.3%. The elevated inventory levels seen in the advance GDP reading last month were revised down less than many analysts had expected, but other parts of the data were more positive for growth going forward. Investment spending was revised up more than expected, due in part to new Q2 data on research and development spending. Also an upward revision to business investment helped boost the Q2 growth rate of domestic demand (real final sales to domestic purchasers) from 2.8% in the advance report to 3.1%. The August Chicago PMI came in well above consensus, reaching levels seen back in May on good growth in new orders. The Conference Board's August US consumer confidence touched the highest level since before the financial crisis, though some view it as a contrarian indicator. Housing remains a sore spot, and the existing home sales report posted a surprise decline m/m making it appear homebuilders may have been a bit too aggressive in raising prices, but the July pending home sales index still painted a constructive picture overall.

The US lending markets appear to be gaining momentum as it works through the scar tissue left from the financial crisis. The latest quarterly checkup from the FDIC revealed in the second quarter banks posted the strongest loan growth since 2007. Net interest income increased nearly 2% y/y which was the fastest pace in more than a year while overall earnings rose 5%. Equifax's National Consumer Credit Trends Report showed that year to date the total amount of new non-mortgage, non-student loan credit originated has grown 11% reaching a 6-year high of $365B. Coincidently cashing in on these improving trends, LendingClub, the world's largest marketplace connecting borrowers and investors filed its long awaited IPO looking to raise $500M.

- The tail end of Q2 earnings season is coming to a close, and it can't be over fast enough for many of the specialty teen retailers, while high end consumers continue to spend. Guess, Abercrombie, Tilly's, Gordmans and Genesco gapped lower after missing expectations and lowering their outlooks. Tiffany's quarterly results topped analyst expectations on robust margin improvement and strong Asia/US SSS, and it also raised FY15 eps targets. In Europe, Hermes and Ferragamo saw results beat expectations sending their stocks higher. Best Buy initially moved down after reporting better than expected earnings on improving profitability in the second quarter. Unfortunately revenues were short of analyst expectations while SSS decline 2% on weakness in consumer electronics, mobile phones in particular. Shares rebounded by the end of the week after many defended the name and also in anticipation of next month's iPhone 6 launch.

- Roche made an all cash play for Intermune at $74/share, 60% above where it was trading when the latest round of takeover speculation broke out in late July. The $8B deal will help Roche expand into the treatment of rare or incurable diseases. On Tuesday Burger King Worldwide Inc. confirmed it had struck a deal to buy Canadian donut chain Tim Horton's Inc. for about $11 billion. Investors welcomed the deal after Warren Buffett got involved in financing the takeover. Berkshire Hathaway committed $3 billion of preferred equity financing and 3G Capital will own about 51% of the new company. Berkshire, which previously joined with 3G to buy H.J. Heinz & Co. in 2013, won't have any participation in the management and operation of the business.

- The USD consolidated its recent gains against the major currencies as it benefited from a divergent view emerging from the G3 central banks (US, ECB and BOJ) at the Jackson Hole symposium last weekend. Draghi's Jackson Hole commentary was viewed as dovish and left the door open for unconventional instruments including QE. The ECB currently appears to be in 'wait-and-see' mode ahead of the September launch of the TLTRO program and its potential impact but that could change with upcoming ECB staff projections. The EUR/USD gapped to an 11-month low below 1.3150 as European stock trading drew to a close on Friday. The EUR/CHF cross hit its lowest level since Jan 2013 (1.2050) sparking speculation on how the SNB will defend its currency floor.

- The Shanghai Composite fell for the first time in 7 weeks, shedding about 1% to close at 2,217. China industrial profits growth slowed to 13.5% from 17.9%, weighed down by the mining sector where profitability contracted 13.2%. The July Conference Board leading index matched an 8-month high, but resident economists noted "improvement was driven primarily by an increase in new floor space starts, which is unsustainable in the longer-term", adding that bank lending activity offered its weakest contribution since January 2012. Amid the rising speculation of greater probability of an easing sometime before the end of the year, the PBoC boosted its weekly liquidity injection to a net CNY45B from just CNY11B in the prior week.

- In Japan, the cabinet office maintained its economic assessment of "moderate recovery trend" intact, but warned about the possibility of prolonged impact from sales-tax related consumption decline and also cut its view of corporate profitability. The balance of July economic data remained largely mixed - the unemployment rate rose for the second consecutive month but the job-applicant ratio hit a 22-year high. Household spending contracted for the fourth consecutive month, and the leading Tokyo core CPI for August slowed to a 4-month low. USD/JPY hit a 7-month high near ¥104.30 early in the week after BOJ Governor Kuroda stated that the central bank might have to pursue its aggressive monetary policy easing for "some time" to fully vanquish deflation. Late next week, BOJ will announce its policy decision, and PM Abe will unveil the details of cabinet reshuffle on September 3rd.