September Volatility Strikes

September has once again proved its reputation for volatility, as global equity indices swung sharply from big gains to big losses this week. After pushing out to new all-time highs last Friday, the S&P500 was unable to hold above 2000 and sharp and punishing declines slammed the index below its 50-day moving average. Besides technical levels, there was no obvious catalyst for the move lower. Rumors circulated about the liquidation of a big institutional position or a hedge fund blowing up, but there was never any reporting to confirm such events. Others attributed the moves to anticipation of the Fed's rate lift off next year and to Russia threatening more counter-sanctions that might tip Europe into recession. Then on Friday, the S&P500 rapidly gained in the final hours of trade, again on no identifiable catalyst. US data out this week was very good, while Europe looked weaker than ever. For the week the DJIA lost 1%, the S&P500 dropped 1.4% and the Nasdaq dipped 1.5%.

The final revisions to second quarter US GDP were in line with expectations, at +4.6% versus the +4.2% preliminary reading, matching the fourth quarter of 2011 as the fastest quarterly growth rate since 2006. Analysts caution the data needs to be viewed in the context of the -2.1% first quarter GDP, which would put the average growth rate for the first half of the year at an unimpressive +1.2%. Early indications are that the third quarter growth estimate will be 3% or more. One point is clear, businesses are starting to invest for growth: in the final revision, business investment rose 9.7%, up from the +8.4% preliminary figure.

August new home sales (504K v 430Ke) rose to a six-year high, while existing home sales (5.05M v 5.20Me) fell for the first time in four months. Analysts noted the strong regional variations in the new home sales data, with sales up big in the south and west but down slightly in the northeast. Sales were flat in the Midwest. Regarding the existing homes sales data, the NAR noted that there was a marked decline in all-cash sales to investors.

The continuing rise of the dollar despite the equity selloff was a central theme this week. EUR/USD pushed out to 22-month lows on of Friday, around 1.2680. Good US economic data, highlighted by the second quarter GDP, contrasted sharply with another round of dismal European numbers, including the September German IFO survey at 18-month lows and September PMI manufacturing right at the flat-line. USD/JPY was at a six-year high, around 109.50. The dollar Index made its 11th-consecutive weekly gain, just shy of 86. Note that WTI crude move up off lows in the $91 handle on Monday, to close out the week around $93.50.

Apple said that its first weekend of iPhone 6/6+ sales were above 10M units, compared to estimates ranging from 6.5 million to 10.0 million units (first weekend iPhone 5 sales topped 9.0 million devices, including China). The iPhone 6/6+ numbers did not include China, where the model was still waiting for approvals from regulators. There were reports that China sales would begin around October 10th; analysts expect about 2.75 million units in initial sales in China.

BlackBerry launched its new PassPort smartphone, perhaps its final chance to regain a foothold in the mobile device market. The aggressively square touchscreen device features a physical QWERTY "touch-enabled" keyboard, comprising its main selling point over Android and iOS devices. In second quarter results out this week, BlackBerry managed to get very close to non-gaap profitability even as revenue missed expectations. Unit sales are also picking up: in the second quarter, BlackBerry recognized hardware revenue on 2.1M smartphone units versus 1.3M in the prior quarter.

Just a week after the Alibaba IPO, activist investors have begun their attack on Yahoo's board to "unlock value." Yahoo sold $6 billion worth of Alibaba shares in the IPO and its remaining 15% stake is valued around $36 billion. Starboard Value announced that it had bought a "substantial" stake in Yahoo and wrote an open letter to CEO Marissa Mayer saying she should buy AOL and unlock the value in its Alibaba and Yahoo stakes.

With Congress unlikely to act on tax reform anytime soon, the Treasury has changed the way it interprets tax law in an attempt to unilaterally make inversion deals "substantially less appealing." The package includes small steps, including moves to change the way foreign ownership is gauged (companies can invert if foreign stockholders own more than 20%) and to make it harder for parents to extract profits from subsidiaries.

In the latest pharma consolidation deal, Germany-based Merck KGaA agreed to acquire US firm Sigma-Aldrich for $17 billion in cash to boost its lab supplies business. Two global fertilizer giants, CF Industries and Yara International of Norway, are discussing a 50/50 merger deal. The combined market value of the companies would be about $27.4 billion, making it worth about as much as Canada's Potash Corp, the world's largest fertilizer producer.

The surprise announcement on Friday that bond king Bill Gross would take his talents to Janus Capital sent a ripple through asset management industry as speculation circulated about Pimco clients leaving with Mr. Gross or moving their holdings to other firms. Janus shares rocketed up 40%, and Pimco parent Allianz lost 5%. Gross reportedly jumped ship after it became apparent he would be fired imminently because of frequent confrontations with co-workers who described his behavior as "increasingly erratic."

The Shanghai Composite gained 0.8% this week, supported by slightly improved economic data and more relief for the property sector. The September HSBC flash manufacturing PMI dodged speculation of a slide into a contractionary territory, turning in a 50.5 print, its fourth consecutive month of expansion. In housing, several top tier cities eased their criteria for "first mortgage" home purchase classification to attract more buyers into the market. The decision follows a particularly soft set of housing price numbers in August and a warning by Moody's that China's nationwide residential property market will decline 5-10% this year. China will release its Industrial Profits data over the weekend, while investors will also watch for any evidence supporting press speculation that PBoC Governor Zhou may be replaced.

In Japan, core CPI measures released late in the week revealed another downtick in inflation, potentially paving the way for more Bank of Japan easing if Q3 data points disappoint. National core CPI of 3.1% was a 5-month low, while ex-sales tax estimated 1.1% price gauge is still well below the 2% BOJ target. USD/JPY hit new 6-year highs above ¥109.50 on Friday after Japan's health minister downplayed earlier expectations that pension fund reform - a boon to riskier assets and a negative for the Yen - would be delayed.