Biggest June Advance in Decade Pushes Stocks Past Bonds in 2012 (Source: Bloomberg)
The biggest June rally for global stocks since 1999 is handing equity investors the year’s top returns, beating the dollar, bonds and commodities. The MSCI All-Country World Index (MXWD) of shares in 45 nations climbed 6 percent over the first six months, led by the U.S., where $1.1 trillion was added to share values. The gain is about 1.1 times the increase in global bonds and 1.8 times more than the dollar after adjusting for daily swings, data compiled by Bloomberg show. Before the adjustment, fixed income climbed 2.9 percent, the U.S. currency added 1.7 percent and the S&P GSCI Total Return index of commodities sank 7.2 percent.
In a year when billionaire Wilbur Ross predicted the U.S. is on the “verge of a recession” and former Federal Reserve Chairman Alan Greenspan said the economy “looks very sluggish,” American companies anchored a rebound that pushed the MSCI gauge up 5 percent in June. Analysts say earnings in the Standard & Poor’s 500 Index will reach a record in 2012 amid forecasts for a 2.2 percent expansion in gross domestic product, the median prediction in a survey of 70 economists by Bloomberg. “The U.S. is the best house in the neighborhood,” Burt White, who oversees $390 billion as chief investment officer at LPL Financial Corp. in Boston, said in a June 27 telephone interview. “We believe that the recovery here is self- sustainable. If you look outside of the United States, it’s a different story. Europe is still in the middle of their crisis. As concern rises, you begin to find a safer place.”
Asian Stocks Rise After Europe Leaders’ Debt-Crisis Deal (Source: Bloomberg)
Asian stocks rose for a fourth day as measures taken by European leaders to address flaws in their bailout programs eased concern about the sovereign-debt crisis and an index of manufacturer sentiment in Japan improved. BHP Billiton Ltd. (BHP), the world’s largest mining company, climbed 1.2 percent after commodity prices rallied. Sony Corp. (6758), Japan’s largest consumer electronics company that gets one fifth of its sales in Europe, gained 1.4 percent. Aristocrat Leisure Ltd. (ALL), an Australian manufacturer of gaming machines, slumped 12 percent after reporting preliminary earnings for the first half of this year. The MSCI Asia Pacific Index advanced 0.4 percent to 117.62 as of 9:46 a.m. in Tokyo, with two stocks rising for each that fell. Markets are closed in Hong Kong today. The Asian benchmark last week capped the biggest weekly gain since January, jumping 2.7 percent, as euro-zone leaders agreed to relax conditions for recapitalizing lenders.
“These appear to be some tangible measures that could help reduce anxiety over the region’s fiscal condition,” said Matthew Sherwood, Perpetual Investments’ head of investment markets research in Sydney. Perpetual manages about $23 billion. “It is another small step that will help boost market liquidity and confidence.” Japan’s Nikkei 225 Stock Average added 0.3 percent after the quarterly Tankan index on sentiment among the nation’s manufacturers beat estimates. South Korea’s Kospi Index increased 0.1 percent and Australia’s S&P/ASX 200 Index rose 1 percent. Futures on the Standard & Poor’s 500 Index slid 0.1 percent today.
Japanese Stocks Advance After Tankan Beats Estimates (Source: Bloomberg)
Japanese stocks rose, with the Topix Index set for its highest close it almost two months, after a survey of sentiment among the country’s biggest manufacturers topped estimates and a European deal on the debt crisis lifted investor sentiment. Canon Inc. (7751), a camera maker that depends on Europe for almost a third of its sales, gained 1 percent. Mitsubishi Corp. (8058), Japan’s top commodities trader by revenue, gained 2.1 percent after crude prices rose the most in more than three years. Nippon Yusen K.K., Japan’s top shipping line, jumped 2.9 percent as it aims to double sales at logistic operations. The Topix gained 0.4 percent to 772.76 as of 9:17 a.m. in Tokyo, set for the highest close since May 8. The Nikkei 225 Stock Average (NKY) rose 0.3 percent to 9,035.31, with volume almost 20 percent above the 30-day average. The gauge rose for a fourth day as the yen weakened against the euro and Spanish and Italian bond yields fell after last week’s European summit.
“Investors are now in a situation to take risks,” said Hideyuki Ishiguro, assistant manager of investment strategy at Okasan Securities Co. in Tokyo. “The European Central Bank may lower interest rates this week.”
U.S. Stocks Rally to Give Dow Best Month Since October (Source: Bloomberg)
U.S. stocks rallied for the week, lifting the Dow Jones Industrial Average to the best monthly gain since October, amid optimism an agreement by European leaders on banks will help contain the region’s debt crisis. All 10 industry groups in the Standard & Poor’s 500 Index rose. Energy companies jumped the most, climbing 4.8 percent, as oil rebounded. A gauge of homebuilders rallied 13 percent as housing data beat forecasts and Lennar Corp.’s profit surged. Hospital companies including Tenet (THC) Healthcare Corp. jumped after the Supreme Court upheld the core of President Barack Obama’s industry overhaul. Nike Inc. (NKE) sank 12 percent while Research In Motion Ltd. (RIM) plunged 25 percent amid disappointing earnings. The S&P 500 advanced 2 percent to 1,362.16 during the week, extending its increase in June to 4 percent, the most since February. The Dow gained 239.31 points, or 1.9 percent, to 12,880.09 for the week, finishing the month up 3.9 percent.
“It looks like Europe is moving toward a resolution of keeping the euro together,” George Young, a partner at St. Denis J. Villere & Co. in New Orleans, said in a telephone interview. His firm oversees about $1.6 billion. “We are putting money into stocks. We believe that the U.S. is going to do well longer term.”
Emerging-Market Stocks Rise Most in 2012 on EU Meeting (Source: Bloomberg)
merging-market stocks rose the most in eight months after European leaders agreed to ease repayment conditions for loans to Spanish banks, boosting demand for riskier assets. The MSCI Emerging Markets Index (MXEF) jumped 3.4 percent to 937.35 by the close in New York, the steepest gain since Oct. 27. Energy companies rallied the most since October as OGX Petroleo e Gas Participacoes SA surged in Sao Paulo after naming a new chief executive officer. Brazil’s Bovespa rose 3.2 percent while Russia’s Micex Index (INDEXCF) added the most in four months. The Hang Seng China Enterprises Index (HSCEI) of Hong Kong-traded Chinese shares rose by 2.6 percent.
European leaders agreed to drop requirements that governments receive preferred creditor status on crisis loans to Spain’s banks and relax conditions on potential help for Italy. The 21 countries in MSCI’s emerging-market index send about 30 percent of their exports to the European Union on average, data compiled by the World Trade Organization show. Consumer spending in the U.S. was unchanged. European authorities “worked really hard and they did make some progress on a number of important issues, although we are still far away from what I would call a major breakthrough, which is ultimately what we need,” Benoit Anne, head of emerging-market strategy at Societe Generale, wrote in an e- mailed note to clients today. “The most significant development is probably the tiny steps towards creating a banking rescue framework at the EU level.”
European Stocks Climb for a Fourth Week on EU Agreement (Source: Bloomberg)
European stocks rose for a fourth week as the region’s leaders agreed to address flaws in their bailout programs to ease the sovereign-debt crisis. CRH Plc rallied 12 percent, leading a gauge of construction companies to the biggest gain in six months. Colruyt NV (COLR) jumped 16 percent as Belgium’s biggest discount food retailer reported a surprise increase in profit. Barclays Plc (BARC) slumped 19 percent after paying a record fine to settle claims it sought to rig the London and euro interbank offered rates. The Stoxx Europe 600 Index (SXXP) climbed 1.9 percent to 251.17 this past week, extending the longest stretch of gains since January, after policy makers eased repayment rules for Spanish banks, relaxed conditions for possible aid to Italy and unveiled a $149 billion economic growth plan. The advance pushed the measure to the highest level since May 11 and trimmed the second-quarter decline to 4.6 percent.
“The results were as good as we could have expected from the summit,” said Derry Pickford, who helps oversee $1.7 billion at Ashburton Ltd. in Jersey, the Channel Islands. “There are two important caveats: expectations were very low and the measures are short-term analgesics rather than fundamental cures.”
China Stocks to Extend Drop After Losing 2012 Gains (Source: Bloomberg)
China’s stocks are poised to extend losses after erasing this year’s gains amid concerns over a slowing economy, according to the only strategist who forecast declines for Chinese shares in 2012. The economy probably expanded at a “subpar” rate in the second quarter and investors should buy shares of companies such as consumer-staples producers, whose earnings may be sheltered from the slowdown, Hao Hong, head of Chinese research at Bank of Communications Co. in Hong Kong, said by e-mail yesterday, declining to name stocks. The Shanghai Composite Index may fall “briefly” below 2,000 in a worse-case scenario, he said. The gauge is down 0.2 percent this year after losing 1 percent yesterday to 2,195.84, the lowest level since Jan. 6. It tumbled 7.4 percent in June, the second-worst performance of 95 major indexes tracked by Bloomberg, as lower-than-estimated industrial output and retail sales data overshadowed the central bank’s first interest-rate cut since 2008.
“The market is collapsing,” said Hong, who was previously a global equity strategist at China International Capital Corp. “I am again waiting for a capitulation like the one in January.”
Dubai Shares Gain on Europe Plan; Kuwait Rises on Cabinet Shift (Source: Bloomberg)
Dubai’s shares advanced the most in three weeks, helping gains in Persian Gulf stock markets, after oil surged on optimism that Europe’s debt crisis may be contained, boosting the appeal for riskier assets. Emaar Properties PJSC (EMAAR), developer of the world’s tallest skyscraper, climbed 1.8 percent. Dubai Islamic Bank PJSC (DIB), the United Arab Emirates’ biggest bank complying with Islamic banking rules, rose the most since May. Dubai’s benchmark DFM General Index (DFMGI) increased 0.7 percent, the most since June 11, to 1,462.52 at the 2 p.m. close in the emirate. The gauge slumped 12 percent in the second quarter. The Bloomberg GCC 200 Index (BGCC200) of the Persian Gulf region’s top 200 equities rose 0.1 percent, while Kuwait’s shares advanced as the resignation of the nation’s cabinet was accepted.
Oil for August delivery surged 9.4 percent on June 29 to $84.96 a barrel in New York after European leaders agreed to ease repayment rules for emergency loans to Spanish banks and relax conditions on help for Italy. It was the biggest increase since March 2009. Gulf Arab oil exporters, including the U.A.E. and Saudi Arabia (SABIC), supply about a fifth of the world’s oil.
Billionaire Catsimatidis Says Buy JPMorgan as Cuban Shuns Stocks (Source: Bloomberg)
Stock markets can soar or falter in an instant. One day the European debt crisis is receding, the next day the region’s on the brink of disaster. Economic statistics never give investors the whole picture. In these jarring times, Bloomberg Markets magazine in its August issue asked six billionaires for their advice on which stocks might outperform the market in the next 12 months. Their responses showed much disagreement: Peter Hargreaves, the largest shareholder of Hargreaves Lansdown Plc, the U.K.’s biggest retail broker, said water, health care and technology stocks will outperform in the next 12 months. Casino mogul Phil Ruffin, who controls the Treasure Island Hotel Casino in Las Vegas, and Mark Cuban, the owner of the Dallas Mavericks basketball team, both say to avoid stocks unless you have better information than the market.
“Pay off debt,” says Cuban. “Search online for the best price on items your household needs. Pay local merchants in cash, while still paying sales tax. You’ll never lose money or sleep.”
Euro Falls Against Peers Before Jobs, Manufacturing Data (Source: Bloomberg)
The euro fell against most peers before data today that may show the currency bloc’s jobless rate climbed to a record and manufacturing contracted, boosting prospects the European Central Bank will cut interest rates. The ECB, which has kept borrowing costs at a record low of 1 percent since December, will probably lower the benchmark rate by 0.25 percentage point on July 5, a Bloomberg News survey of economists shows. The 17-nation currency posted the biggest jump in more than a year versus the yen on June 29 after euro leaders eased terms on loans to Spanish banks, taking a step toward resolving the region’s debt crisis. “We can’t buy the euro yet,” said Marito Ueda, senior managing director in Tokyo at FX Prime Corp. (8711), a currency-margin company. “The outlook for Europe’s economy is still bleak, and it still remains to be seen what economic measures will be undertaken there.”
The euro dropped 0.3 percent to $1.2632 as of 10:08 a.m. in Tokyo from the close in New York on June 29. It fell 0.3 percent to 100.77 yen after rising 2.2 percent at the end of last week, the biggest advance on a closing basis since March 2011. The greenback was little changed at 79.77 yen.
FOREX-Euro stages relief rally on EU agreement
LONDON, June 29 (Reuters) - The euro rose sharply against the dollar after European leaders agreed on decisive action to lower the borrowing costs of Italy and Spain and create a single supervisory body for euro area banks.
"The proposed changes to the EFSF/ESM have come as a surprise and these are bringing down euro zone peripheral bond spreads and pushing the dollar and the yen lower," said John Hardy, currency strategist at Saxo Bank.
Treasuries Snap Decline Before Manufacturing, Jobs Data (Source: Bloomberg)
Treasuries snapped a decline before reports this week that economists said will show manufacturing growth slowed and the U.S. added fewer than 100,000 jobs for a third month. Benchmark 10-year yields were 20 basis points from the record low, reflecting demand for the relative safety of U.S. debt. Jim Yong Kim, who took over as World Bank president yesterday, said his first task will be to help emerging markets keep expanding at a time of stress for the world economy. “The economy is getting worse” in the U.S., said Hajime Nagata, an investor in Tokyo at Diam Co., which manages the equivalent of $124 billion and is an arm of Dai-ichi Life Insurance Co., Japan’s second-biggest life insurer. “Manufacturing and the labor market are disappointing. We bought in June,” in the Treasury market, he said.
Benchmark 10-year notes yielded 1.64 percent as of 9:32 a.m. in Tokyo, according to Bloomberg Bond Trader data. The all- time low yield was 1.44 percent set June 1. The 1.75 percent note due in May 2022 changed hands at 101.
Kim Says World Bank’s First Priority Is to Aid Growth (Source: Bloomberg)
Jim Yong Kim, who took over as World Bank president yesterday, said his first task will be to help emerging markets keep expanding at a time of stress for the world economy. “We begin our work together at a crucial moment” as the global economy “remains vulnerable,” Kim wrote in an e-mail to the Washington-based bank’s staff obtained by Bloomberg News. “My immediate priority will be to intensify the Bank Group’s efforts to help developing countries protect growth and jobs.” The 52-year-old Kim, the former president of Dartmouth College, succeeds Robert Zoellick at the helm of a poverty- fighting institution that made loans worth almost $53 billion last year. Kim, a physician by training, has little time to ease into a job that stretches beyond his expertise as global growth is threatened by the European debt crisis and a slowdown in China.
“This is about financial crisis management, macroeconomics, understanding the workings of the European monetary union and what the risks are and prioritizing countries” according to their needs, said Uri Dadush, director of international economics at the Carnegie Endowment for International Peace in Washington and a former World Bank director of economic policy.
China’s Manufacturing Growth Weakens as New Orders Drop (Source: Bloomberg)
China’s manufacturing expanded at the weakest pace in seven months as overseas orders dropped, and South Korea cut its estimate for export growth this year, underscoring risks to Asian economies from Europe’s debt crisis. The Purchasing Managers’ Index fell to 50.2 in June from 50.4 in May, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday. South Korea’s Ministry of Knowledge Economy lowered its projection for overseas sales to an increase of 3.5 percent from 6.7 percent, citing a slowdown in major economies. Manufacturing data from China, the world’s biggest exporter, signal the government may need to add stimulus to arrest an economic slowdown that probably extended into a sixth quarter. The downturn is rippling through Asian nations, with South Korea’s sales to China, its biggest market, stalling in the first 20 days of June.
“It’s clear the slowdown of export growth as a result of weakness in Europe and the U.S. continues to weigh on the Chinese economy,” said Lu Ting, head of greater China economics at Bank of America Corp. in Hong Kong. The weaker PMI reading “will likely push policy makers to introduce incremental measures such as reserve-ratio cuts and easing lending restrictions to stabilize growth,” he said.
Hiring Probably Cooled in Second Quarter: U.S. Economy Preview (Source: Bloomberg)
The jobs tally in June probably crowned the weakest quarter for employment in more than two years, evidence the U.S. recovery has lost momentum, economists said before reports this week. Employers increased payrolls by 90,000 workers last month after a 69,000 gain in May, according to the median forecast of 59 economists surveyed by Bloomberg News ahead of Labor Department figures due July 6. Excluding government agencies, private hiring may have climbed by 100,000, concluding the smallest quarterly advance since the first three months of 2010. The job slump has shaken confidence and stalled household spending, which accounts for about 70 percent of the economy, making the expansion more susceptible to any fallout from the European debt crisis. Slowing consumer and global demand is also leading to a cooling in manufacturing, a mainstay of the recovery, another report this week may show.
“We really need to see job creation pick up, which is the only thing that’s going to get households spending on a sustained basis,” said Paul Dales, a senior U.S. economist at Capital Economics Ltd. in London. “The economy isn’t going to get exceptionally weak from here, but neither is it going to get much stronger.”
Mao College Town Booms Signaling Offset to Slowing China Growth (Source: Bloomberg)
In a hard hat and muddy boots, Ren Jinbo sits below a half-finished railway bridge, happy to be back mixing cement in the central Chinese city of Changsha. “It’s certainly better than plowing the field back home,” said Ren, 41, who was laid off and returned to rural Shaoyang in January as national efforts to cool construction spending and house prices slowed building. “My boss phoned me in early May that the work must be accelerated, so here I am again.” The boom in Changsha and other inland cities is cushioning China and the world at a time when global growth is slowing, and may help relieve the damping effects of the debt crisis in Europe, China’s largest export market. First-quarter growth in Changsha was 10.8 percent, compared with 8.1 percent nationally.
“The key target of government spending is in central and western Chinese places like Changsha,” said Zhu Haibin, Hong Kong-based chief China economist at JPMorgan Chase & Co. “Economic growth in inland provinces has been stronger than coastal areas and the trend is expected to continue for another five to 10 years.”
Japan Tankan Improves Even as Yen Gain Limits Exports (Source: Bloomberg)
Japan’s large manufacturers became less pessimistic as declines in commodity prices aided profitability, boosting the outlook for the world’s third- biggest economy even as a stronger yen crimps exports. The quarterly Tankan index of sentiment was minus 1 in June from minus 4 in March, the Bank of Japan said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg News was for a reading of minus 4. A negative number means pessimists outnumber optimists. Bank of Japan (8301) policy makers meeting on July 11 and 12 will weigh whether improved sentiment and progress in tackling Europe’s debt crisis are enough to warrant withholding further stimulus. Today’s report showed Japanese businesses estimate their capital spending will rise 6.2 percent in the year ending March, up from a previous forecast of no change.
“Today’s data won’t deliver relief to the Bank of Japan,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co., who correctly forecast the minus 1 reading and predicts the central bank will expand its asset purchases. “It’s increasingly unclear that global demand, which is key for Japan’s economy, can gain traction to lead the recovery.”
S.Korea Inflation Moderated to Slowest Pace in 32 Months (Source: Bloomberg)
South Korea’s inflation moderated in June, giving the central bank more leeway to forgo raising borrowing costs at a policy meeting on July 12. Consumer prices increased 2.2 percent from a year earlier after a 2.5 percent gain in May, Statistics Korea said today in Gwacheon, south of Seoul. The median estimate in a Bloomberg News survey of 12 economists was for a 2.5 percent gain. Prices fell 0.1 percent from May. The Finance Ministry on June 28 lowered its forecasts for inflation and economic growth for this year, citing the European debt crisis as a “long-term threat.” The Bank of Korea, which targets inflation at between 2 percent and 4 percent, will determine borrowing costs on July 12. “Inflation is going to decelerate for months to come,” said Lim Ji Won, an economist at JPMorgan Chase & Co. in Seoul. “Prices of manufactured goods have been falling with oil prices so this is being reflected in June.”
The won jumped to a seven week high on June 29 as European leaders made progress in aiding the region’s indebted countries, strengthening 0.8 percent to 1,145.40 per dollar at the close in Seoul, according to data compiled by Bloomberg. The Kospi stock index rose 1.9 percent.
South Korea Exports Expand as Weak Won Offsets Europe Crisis (Source: Bloomberg)
South Korea’s exports rose in June, snapping three months of declines, after a weaker won fueled overseas sales even as China’s growth slowed and Europe’s debt crisis deepened. Overseas shipments rose 1.3 percent from a year earlier, the Ministry of Knowledge Economy said in a statement today, after a revised 0.6 percent decline in May. The median estimate in a Bloomberg News survey of 16 economists was for a 0.5 percent gain. South Korea announced 8.5 trillion won ($7.4 billion) of economic support measures on June 28 and cut its growth outlook, citing Europe’s “long-term threat” to the nation’s expansion. The Bank of Korea kept borrowing costs unchanged for a 12th month in June and the ministry today cut its estimate for export growth this year. “South Korean exporters are coping with the European crisis with a weaker currency and by diversifying their products and markets,” Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul, said before the release.
The won has fallen about 6 percent over the past 12 months. It strengthened 0.8 percent to a seven week high of 1,145.40 per dollar on June 29, according to data compiled by Bloomberg, as European leaders made progress in aiding the region’s indebted countries. The Kospi stock index rose 1.9 percent.
Clinton Says Sanctions Pushing Iran Toward Negotiations (Source: Bloomberg)
Secretary of State Hillary Clinton said Iran will face increasing pressure from economic sanctions aimed at its disputed nuclear program. “The pressure track is our primary focus now, and we believe that the economic sanctions are bringing Iran to the table,” Clinton said in an interview with Bloomberg Radio in Geneva on June 30. “They are going to continue to increase and cause economic difficulties for them.” Sanctions advocates in the Obama administration and U.S. lawmakers have been weighing ways to tighten American sanctions. Proposals under discussion include expanding the restrictions to cover all Iranian financial institutions and trading companies, sanctioning money-changers and alternative payment systems, and banning trade and investment in all of Iran’s energy sector.
Three rounds of international talks since April have failed to achieve a deal to satisfy international concern that Iran is seeking the capability to build nuclear weapons. Those skeptical about sanctions, such as Trita Parsi, president of the National Iranian American Council, have questioned whether they are effective in compelling regimes such as Iran’s to compromise. They say in some cases economic penalties have strengthened hardline factions.
Euro Leaders Turn to Central Bankers for Help to Tackle Crisis (Source: Bloomberg)
Europe’s political leaders turn to the European Central Bank this week, seeking assistance from monetary policy makers to reinforce gains following euro-area leaders’ moves to calm markets and accelerate the currency bloc’s integration. The Frankfurt-based ECB may offer help on July 5, with economists expecting an interest rate cut. The bank has a track record of action following political progress, including bond purchases that followed bailout programs and unlimited three- year loans on the heels of pledges supporting fiscal discipline. European Union leaders ushered in the strongest rally in the single currency and in Spanish bonds this year after agreeing at their June 28-29 summit to loosen bailout rules, lay the foundations for a banking union and break the link between sovereign and banking debt through the direct recapitalization of lenders. EU leaders will try to maintain the muscle-flexing by seeking to convince investors that the euro area will do everything it can to end the three-year crisis.
“The summit produced several tangible outcomes that will help us address the challenges,” ECB Executive Board member Joerg Asmussen told Greek newspaper Kathimerini in an interview. The comments were confirmed by the ECB on June 30.
ECB May Need to Buttress Bond-Market Respite Leaders Made (Source: Bloomberg)
The European Central Bank is now the focus of investors urging the ECB to reclaim the lead in crisis- fighting after euro-area governments yesterday delivered relief to the bond markets of Spain and Italy. By addressing flaws in their bailout programs, moving toward a banking union and trying to break a negative loop between troubled sovereigns and lenders, leaders sparked the biggest rally in Spanish bonds and the euro this year. Whether the gains continue may depend on the willingness next week of ECB policy makers to reward political progress with greater crisis-fighting steps of their own. Governments must also avoid their past mistake of declaring victory too soon as investors press them to move faster on binding the 17-nation euro region more tightly.
“The ball is very much in the ECB’s camp,” Gilles Moec, co-chief European economist at Deutsche Bank AG in London, said in an interview with Bloomberg Television. “The statement creates an environment in which it makes it easier for them to take more unorthodox decisions.”
Greenspan Says Europe Like a ‘Leaking Boat’ With Holes (Source: Bloomberg)
Alan Greenspan, a former Federal Reserve chairman, today compared Europe to a “leaking boat” and said political consolidation is the only solution to the region’s financial crisis. “The problems in Europe are the fiscal deficits of all the various countries that are involved,” Greenspan said in an interview on CNBC television. “It’s like a leaking boat in which we keep bailing it out and we’re very pleased with ourselves that we’d be able to keep bailing it out. The problem is we haven’t fixed the holes yet.” European leaders in Brussels this week held their 19th summit since the sovereign-debt crisis started more than two years ago. Euro-area nations granted immediate respite to the stressed bond markets of Spain and Italy, leaving investors looking to the European Central Bank to provide more lasting relief.
“The only solution to the European crisis is political consolidation of Europe. I think we’re gradually moving in that direction; in fact I know we are,” Greenspan, 86, said in the interview. “The only issue is, will we ever reach that?” By addressing flaws in their bailout programs, moving toward a banking union and trying to break a negative loop between troubled sovereigns and banks, euro-area officials triggered the biggest rally in Spanish bonds and the euro this year.
TradeTheNews.com Weekly Market Update: Germany softens its stance, allowing EU summit to exceed low expectations, sparking risk on rally; 'Obamacare' upheld
By TradeTheNews.com - Fri 29 Jun 2012 15:49:52 CT
The week commenced with investors eagerly anticipating two key events, the EU summit and a Supreme Court ruling on healthcare. Both had surprising outcomes. On Thursday the US top court upheld the constitutionality of the individual mandate, the backbone of President Obama's Affordable Care Act. The ruling provided a lot of political fodder for Washington, while overall market sentiment softened upon its release. With that out of the way, attention turned squarely back to Europe as the month and quarter end drew near. On Monday, Spain submitted its formal request for bank sector aid, and then European officials turned their attention to setting details of a growth pact to compliment the fiscal compact. Leading up to the opening of EU summit, expectations were being tamped down, particularly by German officials, who repeatedly vowed their staunch opposition to the notion of mutual liability, most notably to Eurobonds and deposit insurance. Late into the summit's first day President Van Rompuy confirmed that leaders had agreed on a growth agenda valued at €120B, or 1% of EU GDP. The surprise turn came later that night when EU leaders agreed to direct the firewall funds of the EFSF and ESM toward direct recapitalization of banks, reversing the German stance against it. Additionally and more importantly, countries not currently involved in bailout programs (Spain & Italy) will be allowed to access funds, and any ESM loans made to Spanish banks will not have creditor seniority. The potential for a break in the cycle of ever higher borrowing rates across Europe really goosed sentiment. European peripheral yields plummeted and the US 10-year yield moved below that of the German Bund for the first time since early February.
Investors aggressively piled into risk trades, and even some backtracking by German Chancellor Merkel had little effect after she reminded everyone that the ESM bank recapitalization plan would need unanimous approval and aid from the EFSF/ESM will always have certain conditions and could take up to one year. After trading below $80 for much of the week, crude futures rocketed up over 9% on Friday, and gold simultaneously gained over 3%, ending the week near $1600. The EUR/USD surged two big figures briefly approaching 1.27. Thanks to the huge rally on Friday stocks were up this week: the DJIA gained 1.9%, the S&P500 rose 2% and the Nasdaq added 1.5%, making it the best June for stocks since 1999.
The US Supreme court decision on Thursday held that the mandate at the center of President Obama's healthcare overhaul is constitutional as a tax (but not as a 'penalty' as it was framed by the Obama Administration). Chief Justice Roberts joined the left wing of the court to uphold the mandate, not based on the Commerce Clause but on the basis that Congress has the authority to set taxes. The court also ruled to limit Medicaid expansion but did not invalidate it. This decision was a real stunner as almost no one expected the law to be upheld in this manner. Almost every lower court rejected the tax argument and the key to almost every decision was the Commerce Clause. Republicans quickly reiterated calls to repeal the law and healthcare insurance industry groups said that major provisions (premium tax) in the healthcare reform law will have unintended consequences including cost increases. Some also argued that the law being upheld will inflame partisanship, making it harder to get a budget deal done heading into next year's fiscal cliff. Congress demonstrated some ability to compromise this week, however, passing the $120B highway transportation and student loan bill in both chambers on Friday.
Several drug names were in the news prior to the Obamacare ruling. Arena Pharma's lorcaserin weight loss pill was approved by the FDA for obese adults (i.e. body mass index of 30 or greater). The company will be required to conduct post marketing studies but because it was the first weight loss drug approved in more than a decade it brought buyers into the entire sector. Teva opened the week with surge after receiving a favorable court ruling in its copaxone patent infringement litigation with Momenta Pharma. The decision covers several patents, the last of which expires on September 1, 2015. Shares of Bristol-Myers and Pfizer moved lower after receiving a complete response letter from the FDA on the application for its eliquis stroke prevention drug, requesting additional information on data management and verification from the Aristotle trial.
Though it took a back seat to Europe and Obama care, the US housing market quietly had a good week. The data continues to point to a potential bottom as sentiment is beginning to brighten. Monday's May new homes sales registered a 25-month high while month's supply figures dropping to levels not seen since late 2005. The April S&P/CaseShiller house price survey showed the smallest y/y decline since Dec 2008. Also May pending home sales registered a 6-month high. After the data, the chief economist at the NAR commented that if housing starts do not rise in a meaningful way over the next two years due to the difficulty in getting construction loans, and barring an unexpected shift in the economy, the steady shedding of inventory could lead to shortages where home prices could get bid up close to 10 percent in 2013. Among the homebuilders, Lennar reported strong results that beat on the bottom line while coming up short of analyst revenue estimates. New home orders rose 40% though with average selling prices climbing and the cancellation rate dropping which has provided a boost for the sector.
Thursday's initial jobless claims were roughly in line with analyst expectations but remained elevated at 386K, further dampening the prospects for a recovery in the monthly payrolls data next week. The data followed a disappointing Q4 earnings report from Paychex, which cuts its FY13 revenue forecast. The payroll, human resource, and benefits outsourcing solutions provider is often viewed as a good barometer of the employment landscape.
Anheuser-Busch confirmed the purchase of the remaining stake in Groupo Modelo shares this week. The $20.1B deal represented roughly at 30% premium bringing the estimated total enterprise value north of $32B. The transaction is expected to close during Q1 2013 and financing has been fully committed.
Throughout the week cracks to the global economic growth story emerged. In their quarterly report the Brazilian central bank cut its 2012 growth forecast to 2.5% from 3.5%. German economic data was generally softer culminating in Friday's disappointing decline in May retail sales figures. Prior to that several large German companies provided commentary indicating they were not immune to Europe's woes. Chip maker Infineon guided Q3 revenues to be "slightly" lower on a sequential basis due to current global economic uncertainties. Siemens CFO said he expected some difficulty in meeting the lower end of its earnings guidance range due to slowdown in China and continued European uncertainty. Salzgitter also revealed it no longer expects to be able to achieve breakeven results for its steel unit this year which weighed on the entire group. By Friday, North American multinational corporations had joined the chorus. Nike shares plunged more than 10% after Q4 results were shy of consensus expectations on weaker margins, while Research in Motion fell nearly 20% as its Q1 Blackberry shipments plunged.
For much of the week the EUR/USD pair hovered in the lower end of its established range from mid-June, with the 1.2450 support seen as pivotal. The higher yields in the Spanish and Italian auctions coupled with weak Italian retail sales offset any benefits of a potential EU fiscal union deal at the upcoming summit. Growth remained a concern for Europe. The German engine showed signs of sputtering while peripherals faced renewed headwinds, exemplified by the Bank of Spain comment that its Q2 GDP contraction would be worse that Q1. Softer inflation data in Europe and weaker German employment figures boosted expectations for an ECB rate cut next week. Analysts are now calling for a 25-50bps cut in the main refi rate from its current historic low level of 1.00%. By Friday the EUR/USD pair exhibited it biggest one day gain in eight months following the EU announcement of its roadmap towards further integration. The EUR/USD moved off its Asian lows of 1.2433 and approached 1.27 by mid-morning before consolidating its gains throughout the European morning.
The USD/JPY currency pair maintained a firm tone despite the Japanese Lower House passing a national sales tax hike legislation and May inflation data disappointing expectations. While PM Noda had succeeded in pushing through his consumption tax increase proposal, the victory in the Diet may have political repercussions for his own party. Former DPJ leader Ozawa is expected to decide as early as Monday on whether he and some 50 of his supporters would bolt the DPJ in opposition to the legislation. Although the initial estimates suggest the number of departing lawmakers would be below the 54 threshold required for DPJ to maintain its lower house majority, the fracture may leave the ruling party in a far more vulnerable state. Meanwhile, Japan May core CPI data returned to deflationary territory, falling into negative territory for the first time in 4 months and potentially signaling yet another increase in the Bank of Japan asset purchase facility at its next meeting on July 12th. The concerns over Europe and cross currency flows caused the JPY to benefit from risk aversion throughout much of the week. But risk was back on during Friday's European session following Day one of the EU Leader Summit. The USD and JPY currencies were weaker against the European and commodity-related pairs.
Over in China, May industrial profits saw its third consecutive month of decline at -2.4% y/y, as attention shifts to the weekend release of the official manufacturing PMI data. Recall the HSBC flash PMI last week shocked to the downside, falling to a 7-month low 48.1. While the official PMI figures have stayed above the 50 threshold until now, analyst consensus appears to be on the side of a contraction this time - the first below-50 print since November of 2011.
