Global Central Banks Still Got the Markets' Back

Assured by an apparent stabilization in global interest rates, market participants sent global equities higher this week on central bank largess and any scrap of perceived good news to hit the tape. In Europe, indices saw a marked upturn despite the emerging sense that Greece was headed for default, while the Shanghai Composite notched seven-year highs on a 7% gain for the week. After emerging from recession in Q4, Japan's Q1 GDP report was even better, growing by its highest rate in a year on an annualized basis at +2.4%. China data remained soft, but the implicit promise of more PBoC support no matter what kept stocks boisterous. US May data was tepid, and the FOMC minutes gave a strong feeling that the Fed would not be raising rates before September. Fed Chair Yellen's Friday afternoon speech did little to alter that notion. There was mixed economic data in Europe, but comments by ECB's Coeure that the ECB would front-load its QE purchases because of the seasonal lack of liquidity in the summer helped gird markets. The US 10-year yield is held near its 200 day moving average just above 2.2% and the Greenback found some buyers. The DJIA and S&P500 saw fresh all-time highs before some very modest selling late in the week, while the Nasdaq approached recent all-time highs. For the week, the DJIA ended down 0.2%, the S&P500 gained 0.2% and the Nasdaq rose 0.8%.

Weak May US economic data points further contributed to the feeling that the Fed would have a very hard time raising rates any time soon. The headline Markit May manufacturing PMI reading was softer for a second consecutive month, dropping to its lowest level since January 2014. Overseas markets continue to be a source of trouble: exports have fallen for two months and manufacturers warned the strong dollar was a big drag on their competitiveness in external markets. Meanwhile the May Philly Fed outlook dropped to 6.7 from 7.5 in April (which had been a four-month high). The NAHB survey of homebuilder confidence slipped lower in May, dropping to 54 from 56 in April, and missed expectations. Following the data, it was hard not to read deeply into this line from the FOMC minutes: "Many participants thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range had been satisfied." Yellen followed the minutes up by reiterating monetary policy would remain data dependent, and emphasized that though the economy continues to progress down the path towards rate normalization this year, the threshold for inflation/wages has not been met yet.

April US housing data reflects the choppy, fits-and-starts nature of the recovery so far. Housing starts rose in April to their highest level since November of 2007. Starts jumped more than 20% sequentially to 1.135 million, for the biggest m/m gain in 25 years. Starts for single-family homes hit their highest level since January 2008. April existing home sales declined slightly from March's very strong showing, due to a lack of supply more than anything else. 

Another week and another summit has passed without a deal between Greece and its European creditors. Stale rhetoric was heard from both sides about "progress being made" and "concessions being discussed." Greece warned it needed a deal by June in order to make a series of large payments. More tellingly, there were reports that the IMF was not interested in being a party to the Greece situation after June, while late in the week German Finance Minister Wlfgang Schaeuble would not rule out Greek default as a possible outcome and mentioned (at a private event) that Greece may need a parallel currency alongside the euro if the country's talks with creditors fail. The Euro fell below the support level of 1.1060 in Fridays session. The Coeure comments on QE helped spark a general resurgence in the Greenback early on, while consternation surrounding Greece and Friday's hotter than expected core US CPI weighed on the Euro further.

Airline stocks stalled in a big way this week as the downsides of lower fuel prices emerged. Southwest hiked its capacity growth rate for 2015 to +8% from +7%, citing higher profitability due in part to cheap fuel lowering costs. After years of keeping capacity on a short leash, investors saw the move as the beginning of a competitive scramble by the airlines, and shares of the US majors were down ~12% a piece on the week, and below 200-day moving averages. The correction in airlines stocks helped push the Dow Jones Transports to new multi-month lows. Some analysts warned about the negative implications of the move, while others argued falling oil prices trumped "Dow Theory" in this case.

Whether quarterly results were good or bad, shares of big chain retailers lost ground this week. Walmart lost 4% on the week after the firm missed revenue expectations in its first-quarter report. Best Buy saw momentary gains after EPS topped expectations, but revenue and earnings were down considerably on a y/y basis (thanks to the firm winding down its Canada operations). The home improvement names had contrasting first-quarter results - Home Depot beat expectations across the board, Loews did the opposite - but shares of both lost ground on the week. Apparel names TJX and American Eagle racked up good gains on solid quarterly results, including very good comp growth. The Gap gapped lower as comps remained negative. 

Six global banks - Bank of America, Citicorp, JPMorgan, Barclays, UBS and Royal Bank of Scotland - agreed to pay $5.8 billion and five of them agreed to plead guilty to charges tied to a FX market rigging investigation. UBS was granted immunity for its cooperation in the investigation. Separately, the Federal Reserve imposed fines of more than $1.6 billion on the five banks for "unsafe and unsound practices."

On the M&A front, CVS Health reached a deal to acquire pharmacy services provider Omnicare for about $12.7 billion, or $98 per share in cash plus $2.3 billion of Omnicare's debt. Omnicare is the largest provider of pharmaceutical services in nursing homes in the US. Time Warner Cable was back in the headlines as French cable giant Altice was reported to be holding talks to acquire the company. Altice's CEO later said at a conference that there were interesting opportunities for consolidation in the US, expect to be "right in the middle" of US cable consolidation. On Friday Salesforce.com popped again after CNBC's confirmed talks between MSFT and CRM progressed recently but the two companies' CEOs were unable to agree on price.

Shanghai Composite marched to a fresh 7-year high above 4,650, ending the week on a high note with an over 8% gain. The early look at May performance has done little to deter the PBoC from maintaining its increasingly more proactive easing path, as HSBC preliminary manufacturing PMI remained in contraction for the 3rd straight month. 49.1 print was below 49.3 expected, and the closely-watched component of new export orders also switched to contraction from expansion. In turn, the equity rally continues to be infused with explosion in retail trading activity, as the latest data showed China total margin debt hit a fresh record high of CNY2.01T, up nearly 5% in just a week.

Nikkei225 was also up moderately, racking up a 2.7% to finish above 20,250 after testing its own multi-year high above 20,300. Q1 GDP expanded for the 2nd consecutive quarter, this time at a more impressive pace of 2.4% on the year - a year high. The most impressive gains were made in the residential investment component, while private consumption continued its steady rise. As speculated after the release of the GDP data, the Bank of Japan took note of both of these trends in its latest monetary policy statement and raised the assessment of housing and consumption. Although the BOJ saw no progress on inflation with expectation of flat prices remaining, the improvement in other areas also allowed policymakers to lift their overall assessment for the first time in nearly 2 years.