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Weekly Wrap 13-19/07/2013

UNITED STATES
This week the US stock market experienced significantly more volatility compared to the past two, when each of the three major indices increased by close to 5%. In the last five trading days the DJIA increased by 0.51%, the S&P 500 by 0.71%, whereas the NASDAQ Composite recorded a negative performance of - 0.35%. Financials were the big winners during the week, as Citigroup, Morgan Stanley, Goldman Sachs and Bank of America reported better than expected earnings, while the Technology sector suffered, because of disappointing results from Google, Microsoft and others.

In addition to corporate earnings, the past trading week has presented a lot of economic data as well. In June, US Retails sales increased by 0.4%, while expectations were for a 0.8% increase. The main drivers behind that number were auto purchases, which picked up by 1.8% MoM. Excluding autos, retail sales were flat in June. The Consumer Price Index increased 0.5% in June on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.8% before seasonal adjustment, up from 1.4% in May. Despite the data that was coming out in the beginning of the week, investors were mainly focused on housing data and Ben Bernankes speech, both scheduled on Wednesday. Following the spike in yields and drop in mortgage applications, which we have talked about in previous wraps, it was kind of logical to expect bad numbers in housing data as well. First of all, mortgage applications were once again down, this time by 2.6%, reporting their 9th week of decline in the past 10 weeks. Since the peaks in May, applications have dropped around 45% and are now in levels as low as those at the beginning of the recovery. If that sounds bad, wait until you hear the housing data. Housing starts printed at 836,000 on an annualized basis, down from 928,000 in May, while expectations were for 957,000. The reported housing starts level is the lowest since August 2012, whereas the miss in expectations is the biggest since the beginning of 2007. And to make things even worse, building permits decreased to 911,000, from 985,000, while analysts expected a reading of 1 million. Officially that was the biggest miss of expectations in the history of the building permits indicator.

Simultaneously with the release of the housing date, FED Chairman Ben Bernanke released the written statement of his semi-annual testimony, which did not offer any new information. The aim of his comments was definitely market reassurance that there is still no definite decision about tapering. In his words: asset purchases are by no means on a pre-set course. Bernanke also made clear (not that he hadnt mentioned it numerous times already) that the timing of the tapering depends on the unemployment rate, inflation rate, growth as well as financial conditions, which have become a little bit tighter recently. His position was that the FED could continue its QE program for longer if conditions continue to be tighter than needed, however, if conditions improve faster than expected, the FED might bring forward or accelerate the start or pace of tapering. The last piece of important economic data for the week came from the Department of Labour, whose weekly report on Unemployment claims came well above expectations. The print for Initial claims came at 334,000, which marked a significant improvement from last weeks 358,000 and also came on top of expectations for 345,000. This print marks the lowest point since the beginning of May, however there are a couple of important points to be made. First of all, it's difficult to precisely measure claims this month because of distortions from events such as annual auto plant shutdowns and the July 4 holiday. The 4-week moving average, which gives us smoother data pattern, was 346,000, a decrease of 5,250 from the previous week's revised average of 351,250. On the other hand, however, the continuing unemployment claims rose by 91,000 to 3.114 million, resulting in the highest point since February. This is also the highest one-week increase since November 2012. It gets even worse if we go one more week back, because the two-week increase in continuing unemployment claims is the highest since February 2009. In conclusion, things are not as bright as someone might have thought. The housing market has lost its initial spark, while the labour market has still not picked up as much as we want. If we put in that equation the rather weak consumption on a retail level, as well as an CPI rate that has yet to show some improvements significant improvements, we get an economy that is very fragile and every little mistake might drag it back down. Having said that, our opinion is that the famous belief that September will be the initial point of QE tapering is wrong. For now the economy is still far away from FEDs targets and we believe that the earliest point when tapering might begin is the end of 2013. This notion might give confidence to investors, who have acted rather infantile every time

someone has talked about QE in the past two months. The effects of Mr. Bernankes reassurance and the bad economic data could already be seen in the yield of the 10yr note, which dropped below 2.5% for the first time since the beginning of July and ended the week at 2.491%. Now, with the FED out of our way, there is only economic data and corporate earnings to focus on for the next week. Existing Home Sales, New Home Sales and House Price Index (HPI) are the next batch of important housing data for June, which will show investors where the sector is going. This will be complemented by the weekly Jobless Claims, Durable Goods orders and Michigan Consumer Sentiment Index at the end of the week.

EUROPE
During the previous week, the main European indexes gained slowly. The DAX elevated by 1.45%, FTSE rose by 1.31%, EURO STOXX gained 2.2 %. The main drivers of volatility this week were the earnings publications, the MPC meeting, as well as Feds Chairman Mr. Ben Bernanke testimony, regarding the condition of the US economy.

European shares chalked up a fourth straight week of gains but ended flat on Friday, dampened by fresh weakness in the technology sector as a mixed earnings season on both sides of the Atlantic intensified. Along with tech firms, pharmaceuticals also suffered, down 0.7 percent and led lower by Belgium's UCB. It fell 2.3 percent after saying it had been visited by Chinese authorities investigating bribery allegations already made against British heavyweight GlaxoSmithKline.

On Wednesday, July 17, the MPC Meeting was held. Bank of England policymakers voted against extending quantitative easing at this month's monetary policy committee meeting, amid signs that economic recovery is becoming "more firmly established". The UK and European markets reacted. Investors were largely shrugging off some better-than-estimated labour-market data from the UK, with the number of people claiming unemployment benefits dropping by 21,200 in June, much more than the 8,000 fall expected. This was the eighth straight monthly drop and the fastest rate of decline in three years.

The MPC made a first foray into forward guidance at its meeting a fortnight ago, taking the unusual step of issuing a statement to financial markets warning them that interest rates were unlikely to rise. That statement should be taking into consideration from the investors, about the further development of the market. We believe that, despite the broadly positive UK development, it had not been enough to warrant such an upward move in the near-term path of bank rate. Persistently weak real income growth with high inflation more than outweighing paltry pay deals was highlighted as a risk to the recovery. "Real income growth had remained weak and it was unlikely that consumption growth could continue at its current rate without some rise in real incomes", was stated by MPC members. However, the MPC said, developments in the domestic economy had generally been positive", and broadly in line with the moderately upbeat picture presented by King at his final inflation report press briefing. For "most members", therefore, "the onus on policy at this juncture was to reinforce the recovery by ensuring that stimulus was not withdrawn prematurely", subject to keeping inflation on track to hit the government's 2% target. Next week, the investors should expect the prelim GDP q/q, which would give an answer of a lot of queries. On Friday, the UK stocks dropped from their highest level in seven weeks as Google Inc. and Microsoft Corp. posted worse-than-projected earnings (the US part of the wrap). British Banks dropped with HSBC Holdings Plc (HSBA) slipping 0.5 percent to 737.5 pence. Investec Plc lowered its rating on the FTSE 100s heaviest stock to hold from buy. Lloyds Banking Group Plc (LLOY) fell 1.1 percent to 69.25 pence. IMI increased 2 percent to 1,400 pence, extending its highest price since at least 1988. Vodafone Group Plc (VOD) added 1.3 percent to 193.85 pence, its biggest advance in two weeks. The worlds second-largest wireless carrier posted a smaller drop in first-quarter service sales than analysts had predicted as markets outside Europe improved. The next week performance of the market would be highly volatile, taking into consideration the continuing earnings season. On Monday the markets should be reflected by the G20 Meeting, which focus will be pointed to the high unemployment, market volatility and the global economic recovery. The global consequences of uncertainty regarding the tapering of US quantitative easing will also likely be on the agenda.

ASIA
China

It has been an extremely busy week in Asia, full of macro news and events, most of which were from China. Retail sales have increased 13.3% in June compared to a 12.9% rise reported in May. Industrial production has risen 8.9% YoY in June, less than market estimates of 9.1% and less than the 9.2% increase posted in the preceding month; the leading economic confidence improved. PBOC released its H1 2013 financial statistics this week. Outstanding loans at the end of June registered 72.87T yuan, up 15.1% YoY, where household loans accounted for 18.8% of the YoY increase. The highlights were also on the money supply where M2 was 105.45T yuan, up by 14% YoY, but 0.2% YTD. M1 registered 31.36T yuan, rising by 9.l% YoY and 2.6% YTD. With the slowdown of the Chinese economy and lower forecasts from various institutions flooding the news, we wish to see some expansion in the banks balance sheet (quite a modern practice these years), in order to become more bullish on the otherwise slumping Chinese market, even though this is not the only factor that can drive the investor expectations up (like in the US). Li said that:The lower limit is to stabilize economic growth and maintain employment, while the upper limit is to prevent inflation, this leads us to believe that China will do whatever it takes to achieve the 7.5% forecasted annual real GDP growth. As it happened on Monday, the YoY real GDP growth matched analyst expectations posting 7.5%. This number surprised most investors, as the overall comments and outlook on the Chinese economy were priced in for a lower growth and as a result, along with the QFII boost noted in last weeks wrap the market rallied at first. As a results of the QFII boost, FDI in China has increased 4.9% from January to June 2013 period compared to a 1.0% rise posted in the period from January to May 2013. Worth noting in equities was Xian LONGi Silicon Materials Corporation (601012) and Risen Energy (300118) which jumped 10% and 7.8%, respectively, after the Chinese government raised the target for solar power generation capacity. We begin to see the green energy plans to start pricing in and reducing the risks of investing in such companies. Quite an easy trade due to the known downward trending commodity prices was Huadian Power International (600027), which increased after it forecasted a substantial jump in its first half year profit, citing declining thermal coal prices.

Japan

This week was the release of the Monthly Report of Recent Economic and Financial Development and the Minutes of the Monetary Policy Meeting. Apart from this, not much else happened in Japan in term of macro news. Something interesting that we decided to show here is the evolution of the first summary sentence of the monthly economic report. August 2012 September 2012 October 2012 November 2012 December 2012 January 2013 February 2013 March 2013 April 2013 May 2013 June 2013 July 2013 Japan's economic activity has started picking up moderately as domestic demand remains firm mainly supported by reconstruction-related demand. The pick-up in Japan's economic activity has come to a pause. Japan's economic activity is levelling off more or less. Japan's economy has been weakening somewhat. Japan's economy has added somewhat weak movement. Japan's economy remains relatively weak. Japan's economy appears to stop weakening. Japan's economy has stopped weakening. Japan's economy has stopped weakening and has shown some signs of picking up Japan's economy has started picking up. Japan's economy has been picking up. Japan's economy is starting to recover moderately.

True, this is backward looking, however if you enjoy cycle analysis, assuming that the stock market is leading the economic cycle, in a booming economy if you notice a downtrending stock market, then some attention should be given to why is this divergence occurs. Of course so far, it seems we re away from such a long term conclusion, but then again the Japanese economy has been like so in the past 20 years. BoJ minutes shows a discussion on steps to stabilise bond market volatility, where some board members contemplated the idea of supplying longer-dated fixed-rate funds in market operations to curb excessive interest rate volatility. Other members opposed the idea fearing that it could be misinterpreted by markets as a revision to the monetary-policy framework. Overall the bond market has been flat as noted in the minutes and most of the yield increases are due to the US tapering expectations.

Many other obvious comments were made, such as the outflow of capital from bonds; due to the increasing yield form the historically low levels. Due to this however interesting things happen. As a result, not only there are some people stuck in evaluating the opportunity cost in waiting until maturity or accepting capital losses and buying new higher yielding bonds, but on the corporate side, many companies have deferred the issuance of new debt for later. This leads to a moderate increase in credit demand, mostly related to M&A activity.

Australia
In line with BoJ and PBOC, the RBA released their minutes too, where another wait and watch statement was announced. They will be waiting until a decision is made, so no change so far. The subject of further interest rate cut if necessary was touch on once again, however for now their view was that the current monetary policy was appropriate. It seems that in Australia, like the USA, watching all economic indicator releases is crucial in understanding what the RBA might decide next. We are expecting big swings to come in the Australian stock and FX market.

Singapore
Moodys Investors Service cut their outlook for Singapores banking system on concern that borrowing costs may climb, as June home sales rose by 24% to 1,806 units, thus posting a second month increase to the highest since Marchs record. The rating agency noted that the rapid loan growth and rising property prices in the city adds more risk to credit quality. I guess finally economists have learned how rising property prices alone does not add much benefit to the economy in the long run.

FOREX
Pair EUR/USD USD/JPY USD/CHF USD/CAD AUD/USD NZD/USD USD/CNY GBP/USD Open 1.3065 99.23 0.9458 1.0394 0.9048 0.7776 6.1375 1.5102 Close 1.314 100.51 0.9404 1.0364 0.9175 0.7924 6.1379 1.5263 Weekly % 0.57% 1.29% -0.57% -0.29% 1.40% 1.90% 0.01% 1.07% Mothly % 1.00% 1.30% -0.44% -1.54% 0.70% 1.60% 0.08% 0.42% YTD 0.59% 14.01% 1.72% 5.03% -12.49% -4.70% -1.49% -4.96%

So, the QE speculations are continuing. The week, on the FOREX markets, was very interesting and inconsistent, for the main counterparts. Obviously, the investors start to accustom to the contradictory statements of Feds Chairman Mr. Ben Bernanke about the reducing stimulus for the US economy. That is why the week was marked by volatility not as strong as the instability caused by the previous testimonies of Mr. Bernanke, held in May and June. According to the expectations the US dollar generally consolidated, with a modest downside bias, over the past week. The Euro strengthened, reaching a level of $1.314 per 1Euro. The British Pound evaluate by 1.07 %, getting to $1.5263 per 1GBP. The risk is for more of the same in the week ahead. A relative light economic and political calendar in North America and Europe will make for thinner participation. At the same time, Bernanke has driven home the conditional nature of the Fed's willingness to scale back on its purchases of long-term assets, as it is stated at the US part of the wrap. That is why we believe that, even if the next week might be marked by devaluation of the Dollar, in a medium long term, we would witnessing a strong increase of the USD against its main counterparts.

The movement of the Yen, during the week, was influenced by elections for Japan's upper house, on Sunday. As the Bank of Japan states, the yen had temporarily appreciated in view of the decline in

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Japanese stock prices, but then has depreciated against the U.S. dollar due to speculation about U.S. monetary policies. In these circumstances, the yens exchange rate against the euro has basically been more or less unchanged, albeit with some fluctuations. In regard to the elections, it is strongly expected that the Prime Minister Shinzo Abe's would win, which would add an aggressive push for monetary easing to lift growth and fight deflation. Under these conditions, our opinion about a bullish USDJPY is maintained. The victory of Mr. Abe would give him more freedom to push his agenda of monetary easing, public spending and structural reform, which could weigh on the yen. The investors would respond, and the reaction will be visible on the Mondays opening of the FOREX market. Australias dollar strengthened during the week. The Aussie reacted on the Chinas GDP data from Sunday, and on the RBA meeting on Monday, as you could read at Asian part. That is why for the first time since June 13th the Aussie has had a rally of over 200 pips. Even that increase, we believe that some further devaluation of the Aussie would be taking place. The main event, which would mark the next week FOREX performance, would be the G20 meeting in Moscow. The group of 20 nations finance ministers will be discussing a common approach to QE programs to avoid market volatility in the future. Ministers will be working out a comprehensible criteria for when and how such programs can be tapered. A predictable exit would be stated, creating a strategy that is supposed to leave investors more secured. The FOREX marked would react. Better be prepared and as always, manage well your money

Calendar
Day Monday Tuesday Wednesday Hour/Time Currency Zone (GMT - 5) 10:00 AM 9:30 PM 9:45 PM 3:00 AM 3:30 AM 10:00 AM 4:30 AM 8:30 AM USD AUD CNY EUR EUR USD GBP USD USD Indicator Existing Home Sales CPI q/q HSBC Flash Manufacturing PMI French Flash Manufacturing PMI German Flash Manufacturing PMI New Home Sales Prelim GDP q/q Core Durable Goods Orders m/m Unemployment Claims Forecast 5.27M 0.5% 48.6 48.9 49.3 482K 0.6% 0.5% 339K Previous 5.18M 0.4% 48.2 48.4 48.6 476K 0.3% 0.5% 334K

Thursday

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