18 June 2014 AMC - Market continues rally as Fed Tapers

18 June 2014 AMC - Market continues rally as Fed Tapers

Market Summary 

European Markets Closing Prices

European markets are now closed; stock markets across Europe performed as follows:

·         UK's FTSE: + 0.2%

·         Germany's DAX: + 0.1%

·         France's CAC: -0.1%

·         Spain's IBEX: + 0.5%

·         Portugal's PSI: -0.5%

·         Italy's MIB Index: + 0.2%

·         Irish Ovrl Index: -0.9%

·         Greece ATHEX Composite: + 0.9%

Before Market Opens 

S&P futures vs fair value: +0.30. Nasdaq futures vs fair value: +4.70.
The S&P 500 futures trade in line with fair value.

Asian markets ended the midweek session on a mixed note. The Bank of Japan released the minutes from its latest policy meeting, which revealed unanimous agreement that the impact of the recent sales tax hike has been within expectations. 

·         In economic data: 

o    China's Housing Prices grew at 5.6% year-over-year, representing a slowdown from the prior rate of 6.7% 

o    Japan's trade deficit narrowed to JPY860 billion from JPY880 billion (expected deficit of JPY1.01 trillion) as exports contracted 2.7% year-over-year (expected -1.2%, previous 5.1%) and imports fell 3.6% year-over-year (consensus 1.7%, prior 3.4%) 

o    New Zealand's current account swung to a surplus of NZD1.41 billion from a deficit of NZD1.51 billion (expected surplus of NZD1.30 billion) 

o    Australia's CB Leading Index ticked down 0.1% month-over-month (prior 0.0%), while MI Leading Index ticked up 0.1% month-over-month (previous -0.5%) 

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·         Japan's Nikkei gained 0.9%, ending on its high thanks to support from industrials. Amada jumped 3.6% and Hino Motor spiked 3.4%. 

·         Hong Kong's Hang Seng shed 0.1% amid weakness in consumer and property names. Want Want China Holdings and China Resources Land lost 1.9% and 1.2%, respectively. Ping An Insurance outperformed, climbing 0.8%. 

·         China's Shanghai Composite ended lower by 0.5% after spending the entire session in the red. Discretionary shares lagged with Beijing Bashi Media and Changzhou Xingyu Automotive down 5.6% and 8.9%, respectively. 

Major European indices hover near their flat lines. The IMF commented on Italy, saying the country's economy is struggling to emerge from the recession and that banks should write off bad loans at a faster pace. 

·         Economic data was limited: 

o    Spain's Industrial New Orders rose 6.9% year-over-year (expected 3.6%, previous 8.7%) 

o    Swiss ZEW Expectations fell to 4.8 from 7.4 (expected 10) 

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·         Great Britain's FTSE is higher by 0.3% with energy names providing support. Royal Dutch Shell and BG Group lead with respective gains of 2.1% and 1.0%. United Utilities Group lags, down 3.4%. 

·         Germany's DAX trades up 0.3%. Financials display relative strength with Muenchener Re up 0.3% and Deutsche Bank higher by 0.2%. Fresenius SE is the weakest index member, down 0.8%. 

·         In France, the CAC is flat. Alstom trades up 1.1%, while Societe Generale holds a loss of 0.8%.

U.S. Equities

·         Equity futures hover little changed ahead of the cash open with a quiet econ calendar likely to produce a choppy trade ahead of this afternoon's FOMC rate decision

·         Both the DJIA and S&P 500 hold within an eyelash of record highs while the Nasdaq trades just below its best level in more than 16 years

·         The VIX (12.06) continues to show complacency in the marketplace as stocks hover near record territory

·         Current Account Balance (-$111.2 bln actual v. -$97.8 bln expected)

o    S&P Futures unch @ 1934

o    Dow Futures +1 @ 16,730

o    Nasdaq Futures +5 @ 3777

Asia

·         Markets ended mostly lower across Asia

·         Japan's Nikkei (+0.9%) was the lone bright spot as buyers emerged after the Bank of Japan upped its economic assessment and removed the word 'deflation' from its description of the economy. Also notable was the Japanese trade deficit (JPY0.86 trln actual v. JPY1.01 trln expected, JPY0.88 trln previous) posting its first YoY improvement since February 2013

·         On the Mainland, China's Shanghai Composite (-0.5%) slipped as home prices fell -0.2%, marking the first MoM decline in two years. Action was also hampered by an onslaught of new issues coming to market

·         Hong Kong's Hang Seng (-0.1%) slipped off its best levels of 2014

·         India's Sensex (-1.1%) tumbled off record highs 

·         Australia's ASX (-0.3%) continued to slide off its best levels in six years

Market Internals

Market Internals -Technical-
The S&P 500 closed up 15 (0.77%) at 1957, the Nasdaq closed up 26 (0.59%) at 4363, and the Dow closed up 98 (0.58%) at 16907. Action came on slightly below average volume (NYSE 614 mln vs. avg. of 657; NASDAQ 1732 mln vs. avg. of 1759), with advancers outpacing decliners (NYSE 2277/849, NASDAQ 1687/973) and new highs outpacing new lows (NYSE 204/10, NASDAQ 114/27).

Relative Strength: 
Junior Gold Miners-GDXJ +4.57%, Silver Miners-SIL +2.81%, Russia-RSX +2.63%, Greece-GREK +2.6%, Wind Energy-FAN +2.28%, Utilities-XLU +2.27%, Sugar-SGG +2.12%, Eastern Europe-ESR +2.03%, Latin America 40-ILF +2.02%, Turkey-TUR +2.02%.

Leaders and Laggards

Technical Updates

Briefing's Commentaries

Closing Market Summary: Stocks Climb While Fed Tapers Again
The major averages posted modest gains on Wednesday after the Federal Open Market Committee announced another $10 billion taper, which was widely expected. The S&P 500 climbed to a new record closing high at 1956.98, adding 0.8% with all ten sectors posting gains.

Equity indices spent the first half of the session near their flat lines as market participants held pat ahead of the afternoon statement from the Fed. The $10 billion reduction lowered the size of monthly asset purchases to $35 billion, while the remainder of the policy statement struck a familiar tone.

The Fed reiterated its commitment to the current level of interest rates, saying rates are likely to remain low for a considerable time after quantitative easing ends. Furthermore, the FOMC released its economic projections, but those were not too different from the prior forecast either. According to the projections, the Fed expects the jobless rate to be between 6.0% and 6.1% at the end of the year after calling for a rate between 6.1% and 6.3% in its last set of projections.

During the press conference, Fed Chair Yellen justified the taper by saying the economy is on track to meet its objectives and that the GDP contraction observed in the first quarter was an aberration. Ms. Yellen also noted that inflation remains below the 2.0% objective, which could lead to broader risks.

The utilities sector (+2.2%) finished in the lead after spending the entire session atop the leaderboard. Thanks to the solid gain, the sector extended its June advance to 2.7%, while also pushing its year-to-date gain to 14.1%.

Elsewhere among countercyclical sectors, telecom services (+0.5%) lagged, while consumer staples (+1.2%) and health care (+0.8%) finished ahead of the broader market.

Meanwhile, the six cyclical sectors ended mixed when compared to the S&P 500. Yesterday's leading group—financials—advanced 0.7%, but could not keep up with the broader market. That was also the case with technology (+0.5%) and industrials (+0.5%).

It is worth mentioning that the industrial sector was held back by defense contractors (PHLX Defense Index +0.2%), while transports rallied broadly after FedEx (FDX 148.95, +8.64) reported better than expected results. The stock surged 6.2%, which also gave a boost to UPS (UPS 102.79, +1.18). For its part, the Dow Jones Transportation Average jumped 1.5%.

Also of note, the weakest sector of the year—consumer discretionary (+0.8%)—trimmed its 2014 loss to 0.5%. Shares of Amazon.com (AMZN 334.38, +8.76) played a part in today's outperformance, rallying 2.7% after the company unveiled a smartphone, which will be available in five weeks.

The afternoon rally to new highs saw some participants lift their hedges, which sent the CBOE Volatility Index (VIX 10.60, -1.46) to a new low for the year.

Treasuries, meanwhile, held slim gains into the afternoon and climbed to new highs after the FOMC statement crossed the wires. The 10-yr note added half a point, lowering its yield to 2.59%.

Participation remained on the light side with just over 610 million shares changing hands at the NYSE.

Economic data was limited to the weekly MBA Mortgage Index and Current Account data for Q1: 

·         The MBA Mortgage index fell 9.2% to follow last week's 10.3% increase. 

·         The current account deficit for the first quarter totaled $111.20 billion while the Briefing.com consensus expected the deficit to hit $97.80 billion. The fourth quarter deficit was revised to $87.30 billion from $81.10 billion. 

Tomorrow, weekly initial claims (Briefing.com consensus 313K) will be released at 8:30 ET, while the June Philadelphia Fed survey (consensus 13.4) and May Leading Indicators (consensus 0.5%) will cross the wires at 10:00 ET. 

·         S&P 500 +5.9% YTD 

·         Nasdaq Composite +4.5% YTD 

·         Dow Jones Industrial Average +2.0% YTD 

·         Russell 2000 +1.8% YTD

Commodities

Closing Commodities: Gold Ends Flat, Crude Oil Ends Below $106/Barrel

·         Aug gold dipped to a session low of $1269.00 per ounce moments before equity markets opened but recovered into positive territory in afternoon action.

·         The yellow metal settled 60 cents higher at $1272.40 per ounce ahead of the latest policy statement from the FOMC.

·         Gold is currently trading 0.1% higher in electronic trade following the Fed's announcement that it will taper its asset purchases by $10 bln to a total of $35 bln and it would keep rates at low levels, as widely expected.

·         July silver trended higher in choppy fashion as it came off its session low of $19.70 per ounce in morning action. It eventually settled with a 0.2% gain at $19.77 per ounce.

·         July crude oil touched a session high of $106.85 per barrel shortly after floor trade opened but slipped into negative territory following weaker-than-anticipated inventory data that showed a draw of 0.579 mln barrels when a draw of 0.7-0.8 mln barrels was anticipated.

·         The energy component brushed a session low of $105.72 per barrel and settled with a 0.3% loss at $105.99 per barrel.

·         July natural gas trended lower after pulling back from a session high of $4.76 per MMBtu set in early morning pit trade. Unable to regain momentum, it settled 1.1% lower at $4.66 per MMBtu.

COMEX Metals Closing Prices

  Aug gold rose $0.60 to $1272.40/oz 

·         Gold dipped to a session low of $1269.00 moments before equity markets opened but recovered into positive territory in afternoon action. The yellow metal settled 60 cents higher as investors await the latest policy statement from the FOMC to be released at 14:00 ET today. 

  July silver rose $0.04 to $19.77/oz 

·         Silver trended higher in choppy fashion as it came off its session low of $19.70 in morning action. It eventually settled with a 0.2% gain. 

  July copper settled unchanged at $3.06/lbs

CBOT Agriculture and Ethanol/ICE Sugar Closing Prices

·         July corn rose 2 cents to $4.41/bushel 

·         July wheat rose 4 cents to $5.86/bushel 

·         July soybeans rose 11 cents to $14.09/bushel 

·         July ethanol fell 9 cents to $2.05/gallon 

·         Sep sugar (#16 (U.S.)) fell 0.03 of a penny to 25.36 cents/lbs

NYMEX Energy Closing Prices

  July crude oil fell $0.29 to $105.99/barre 

·         Crude oil touched a session high of $106.85 moments after floor trade opened but slipped into negative territory following weaker-than-anticipated inventory data. The EIA reported that for the week ending June 13, crude oil inventories had a draw of 0.579 mln barrels when consensus called for a draw of 0.7-0.8 mln barrels. The energy component brushed a session low of $105.72 and settled with a 0.3% loss. 

  July natural gas fell 5 cents to $4.66/MMBt 

·         Natural gas trended lower after it pulled back from a session high of $4.76 set in early morning action. Unable to regain momentum, it settled just above its session low of $4.65, booking a loss of 1.1%. 

  July heating oil rose 2 cents to $3.04/gallon 

  July RBOB rose 1 cent to $3.10/gallon 
Treasuries

Treasuries Gain as Fed Tapers: 10-yr: +14/32..2.599%..USD/JPY: 101.89..EUR/USD: 1.3587

·         Treasuries booked modest gains as the Fed tapered another $10 bln per month from its asset purchase program. Click here to see an intraday yields chart.

·         Today's taper means the Fed has reduced its MBS and Treasury security purchases to $15 bln per month and $20 bln per month, respectively.

·         The complex held small gains into the cash open and ticked to its best levels of the morning following the wider than anticipated current account deficit (-$111.2 bln actual v. -$97.8 bln expected) before drifting into this afternoon's decision. 

·         Up front, the 2y slipped -1.2bps to 0.472% as today's developments pushed back against some worries a recent uptick in inflation would cause the Fed to hike rates sooner than the mid-2015 timeframe that is currently anticipated.

·         The 5y shed -4.1bps to 1.712%. Today's action dropped the yield off two and a half-month highs, but was unable to pierce 1.700% support.

·         The 10y fell -4.2bps to 2.613%. The benchmark yield pressed back below trendline resistance off the 2014 highs, and finished near the 50 dma and key 2.600% support.

·         At the long end, the 30y slipped -2.8bps to 3.418%. Traders will be watching the 3.400% area over the coming days as support and trendline resistance off the 2014 highs converge at the level. 

·         A flatter curve developed with the 2-10-yr spread tightening to 214bps.

·         Precious metals went off near their best levels of the day with gold +$2 @ $1274 and silver +$0.10 @ 19.84.

·         Data: Initial and continuing claims (8:30), Philly Fed, and leading indicators (10).

On other news.... 

Excerpts from Fed Policy Statement:

·         Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months. Labor market indicators generally showed further improvement. 

·         The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow.  

·         The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced.  

·         The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.

·         In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. 

o    Beginning in July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month. 

o    The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

o    The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate. 

·         To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.  

Currencies

Dollar Little Changed Post-FOMC: 10-yr: +12/32..2.605%..USD/JPY: 102.08..EUR/USD: 1.3568

·         The Dollar Index hovers little changed amid a whippy post-FOMC trade. Click here to see a daily Dollar Index chart.

·         Initial reaction to the Fed's $10 bln taper saw sellers push action down to 80.40, but trade has recovered those losses and holds near 80.50 support.

·         EURUSD is +20 pips @ 1.3570 as trade ticks higher in the moments following the FOMC decision. The single currency saw a quick spike to 1.3600, but has pulled back from its best levels. Support in the 1.3500 area remains under close watch. 

·         GBPUSD is -10 pips @ 1.6950 as trade remains on track to post a second day of losses. All in all today has been an uneventful session for the pair despite the latest Bank of England minutes pointing to a slightly more hawkish Monetary Policy Committee. 

·         USDCHF is -15 pips @ .8975 as trade lingers near four-month highs. Support in the .8950 area was put to an early test, but buyers emerged in defense of the 200 dma. 

·         USDJPY is -5 pips @ 102.10 as trade slipped into the red following today's Fed announcement. Overnight, the Bank of Japan upped its assessment of the Japanese economy, and removed the word ‘deflation' from its description. Also notable was the trade deficit (JPY0.86 trln actual v. JPY1.01 trln expected, JPY0.88 trln previous), which marked the first YoY decline since February 2013. 

·         AUDUSD is +25 pips @ .9360 as trade presses session highs. Today's advance comes as buyers take control for the first time in four days after early selling provoked a test of the 50 dma.

·         USDCAD is +10 pips @ 1.0870 as trade holds just off the lows. The pair saw little reaction to the strong Canadian wholesale sales (1.2% MoM actual v. 0.3% MoM expected) before spiking to session highs near 1.0900 as an initial response to today's Fed Statement. Support in the 1.0850 area remains key.

Next Week In View




Economic Commentaries

Economic Summary: Fed tapers by $10 bln to $35 bln in total purchases as widely expected
Economic Data Summary:

·         Weekly MBA Mortgage Applications -9.2% vs Briefing.com consensus of ; Last Week was +10.3%

·         First Quarter Current Account Balance -$111.2 bln vs Briefing.com consensus of -$97.8 bln; Fourth Quarter was revised to 87.3 bln from -$81.8 bln

Fed/Treasury Events Summary:

·         Fed announced it will taper its asset purchases by $10 bln to a total of $35 bln and it would keep rates at low levels as widely expected.

o    Key Points from Statement

§  Beginning in July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month. 

§  Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months. Labor market indicators generally showed further improvement. 

§   To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.  

o    Econ projections

§  Fed sees FY14 GDP between 2.1-2.3% from prior forecast of 2.8%-3.0%

§  Fed sees total PCE inflation of 1.5-1.7% from prior forecast of 1.5-1.6%

o    Janet Yellen Press Conference

§  Janet Yellen said GDP decline is transitory; seeing rebound from early 2014 weakness; inflation continues to run below objective; mindful that inflation below projection will cause risks.

§  Janet Yellen said discussions of exit strategy does not signal a change in the committee; said Fed will keep large balance sheet for a considerable amount of time... said if economy is stronger than expected it could rate hikes sooner... will provide additional details on exit strategy later this year.

§  Janet Yellen said recent data for inflation has been on the high side but believes it is 'noisy'; said not willing to let inflation miss the Fed goal.... cautions that there was turn over in the committee so it is difficult to compare from the March projections... says been slight decline in interest rate outlook due mainly to a slightly lower outlook on growth.

Upcoming Economic Data:

·         Weekly Initial Claims due out Thursday at 8:30 (Briefing.com consensus of 313K ; Last Week was 317K)

·         Weekly Continuing Claims due out Thursday at 8:30 (Briefing.com consensus of 2.638K ; Last Week was 2.614 M )

·         June Philadelphia Fed due out Thursday at 10:00 (Briefing.com consensus of 13.4; May was 15.4)

·         May Leading Indicators due out Thursday at 10:00 (Briefing.com consensus of 0.5%; April was 0.4%)

Jason's Commentaries

It seems that Yellen done it again. Going for another $10b taper until QE ends at 'late year end', we're likely to expect the interest rates to rise by June next year. Looking at the market's strength, i believe we're likely to hit a new high once again. Volumes were above 600m shares traded on the NYSE and a bulk of gains came from the Utilities and Materials. It might have the market turning into a defensive rally. It's not exactly bullish in this case. On the technical perspective, it's likely to be a breakout soon. Furthermore, the world cup is driving the market mad.








Market Call: FLAT to upside

Date: 19 June 2014