May M&A headlines an eventful close to the month

May ended with a shortened yet lively week of trading. Many global markets were closed on Monday for holidays, including Memorial Day in the US, and on Tuesday US markets saw a very broad-based selloff. US equities bounced back midweek, but saw another dip on Friday. Traders saw several notable M&A announcments lead to ever more rumors of consolidation to position around as the week progressed. Chinese equities stumbled hard for a second time this month as the Shanghai Composite declined 6.5% on Thursday from a seven-year high the day before on concerns over tight liquidity and stricter margin requirements. In Europe, Greece's position became even more tenuous as deposit outflows accelerated. Despite Greek officials' declarations that an accord is near, any comprehensive deal still feels a ways away as a June IMF payment deadline approaches. The April Eurozone M3 money supply data provided more tantalizing evidence the ECB's QE program is starting to work as intended: the three-month average growth in M3 money accelerated to its fastest pace since 2009, building on the similarly good results seen in the March reading. Japan was an outlier: the Nikkei extended its winning streak to eleven consecutive sessions, its longest streak since 1988 while the Yen declined to a 12 year low against the Dollar. The US Treasury market easily digested coupon, bill and floating rate note supply to see the benchmak10-year yield decline by 10 basis points. For the week, the DJIA -1.2%, the S&P500 -0.9% and the Nasdaq -0.4%.

As expected Q1 US GDP turned negative in the second reading, dropping to -0.7% from the +0.2% advance report. The contraction was slightly less than expected. Personal consumption was revised slightly lower with the decrease primarily reflecting negative contributions from exports, nonresidential fixed investment, and state and local government spending. The advance April durable goods report was slightly stronger: the -0.5% decline in the headline figure was mainly due to the volatile civilian aircraft sector while excluding transportation durables the data topped estimates at +0.5%. The March data were revised higher for the second time. The May Chicago PMI dipped below 50 again to its lowest reading since Feb and the other regional manufacturing readings suggest next week's May ISM could be soft as well. On a positive note Pending home sales jumped to the best reading in 9-years, suggesting the late spring housing pick-up has legs. 

The euro has given up recent gains over the last two weeks as bond markets have stabilized and European money supply and the preliminary May CPI data suggest the ECB's QE program is starting to banish disinflation. The big speeches by Fed Chair Yellen and ECB's Coeure last week accelerated euro losses. EUR/USD has fallen six big figures over the last two weeks, dropping from 1.145 to test below 1.0820 on Wednesday. USD/JPY has broken out over the last two weeks from the 120 area to test 124.50 on Thursday (13-year high) while the dramatic weakening of the yen has juiced the Nikkei. Sterling has given up all of its post-election gains, while the GBP/USD declined for six consecutive days, its worst run in eight months, dropping as low as 1.5240 from 1.5500 on Monday. 

A Greek default is looking more and more possible after another week without a deal between Athens and its creditors. Greece faces a €300M payment to the IMF next week on Friday, June 5th. IMF Chief Lagarde began saying a Greek exit from the Eurozone would be possible and would not destroy the euro, while European officials said there would be no aid disbursement without a deal by June 5th and furthermore that remaining aid funds would expire with the program at the end of June. The ECB left Greece's ELA limit unchanged at its current level of €80.2 billion for the first time since February. This all follows reports over recent days of a significant increase in deposit outflows from Greek banks over fears of capital controls, as well as talk that ECB officials are getting uncomfortable with the bank's exposure to Greece.

For much of the week crude prices continued to retrace gains made since mid-March. An OPEC report out earlier this week (5/28) suggested that oil supplies would keep growing through 2017, with the North America oil production boom resilient despite low prices. Friday saw a dramatic reversal, sending prices higher by nearly 5%. With the OPEC set to meet next week in Vienna and pre-meetings scheduled with Russia, traders appear to have been squaring some positons. There were also reports of more ISIS wins in Libya and other parts of the Middle East. Finally, note that the EIA inventory data saw its fourth straight week of drawdowns accompanied by signs demand is ramping up. WTI crude dipped below $56.50 on Wednesday, a five-week low before ending the week back above $60.00. 

In earnings, Tiffany surged more than 10% after widely beating revenue and earnings expectations, even as earnings and revenue were lower on a y/y basis, and global comps fell 1%. Michael Kors lost 25% on very weak guidance for its first quarter and full year. Comps were down 1.7%. Kors had plenty of positive comments about its future expansion, but investors were not impressed. Costco's third-quarter results were more or less in line. Abercrombie had weak overall numbers, but sales comp losses appeared to bottom out and shares saw decent gains on the week.

Charter Communications reached a deal to buy Time Warner Cable for $55 billion. Including debt, the deal is valued at about $79 billion. Charter will pay $195.71 per share in the cash-and-stock deal - $100 of it in cash with the rest in Charter shares. Broadcom agreed to be acquired by Avago Technologies for $37 billion in cash and stock. The deal set off more takeover chatter in Altera, with the New York Post reporting that Intel is close to acquiring Altera in a $15 billion deal priced as high as $54/shr. Recall that the standstill agreement between Altera and Intel gives Intel the option to launch a hostile bid after June 1st.

Shanghai Composite turned increasingly more volatile late in the week, falling 6.5% on Thursday and trading down another 4% in the opening hour on Friday. The losses erased three strong consecutive gaining sessions and sent the mainland index lower by 1% for the week - its first down week in the last 3. Worries about a margin-fuelled equity bubble sparked the broad selloff with several brokers moving to tighten their margin requirements in response to the unprecedented inflows in leveraged funds from retail investors. On Friday the party's mouthpiece People's Daily elevated its alert level over the overdevelopment of financial sector, while the PBoC warned about the potential risks associated with stock margin trading and also selectively used repos to drain liquidity for the first time since late 2014.

Japan's Nikkei225 bucked global trends, rising 1.5% for the week to test 15-year highs above 20,600. Multi-year lows in the Japanese yen helped exporters, just as economic data late in the week solidified expectations for the BOJ to at least maintain its easy stance over the medium term, if not add further stimulus. National CPI figures came in near 2-year lows, with the impact of April 2014 consumption tax hike rolling off on annualized basis. Even more telling was the surprise decline in consumption against expectations of its first rebound in over a year, particularly given the more upbeat assessment on spending in the latest BOJ statement. On the bright side, Japan's unemployment fell to a new 18-year low while job-to-applicant ratio hit a 23-year high. Japan cabinet officials are hopeful that the tight labor market will lead to greater bargaining powers for workers, spurring wage inflation and boosting spending in the 2nd half of the year.