Market Outlook | June 30, 2014

“The naked truth is always better than the best dressed lie.” Ann Landers 1918-2002

Unscathed theme

A new month awaits as the first half of 2014 draws to a close. Surely, the major themes have not been rattled. Asset prices continue to inch higher, from stocks to real estate to commodities. Yield chasing is reaching desperate levels as risk taking extends from southern European to African bonds. The belief in central bankers appears to outweigh future concerns including the macro-climate that's full of tension, from Iraq to Ukraine. A panic-like response is not on the minds of investors. Stability mixed with confidence is the script the Fed preaches, and the lack of investor alternatives is the hymn sung by participants. Desired or not, that’s the reality for those risking capital. Surely, cash is not deemed king by asset allocators, given unattractive savings rates. And inflation is not a current worry that has been heard too often and feels like a slogan in financial circles. It’s a new season, but the same ol’ policy.

The takeaway is that low rates are here to stay, with corporations continuing to borrow at ‘attractive’ borrowing rates. This is the heartbeat of this daily market movement, which continues to fully believe in and respect the powers of the Fed. Frankly, dissenting with the Fed’s policy is not an option when putting capital at risk.

Shock-averse

Low-volume days persist, and the slow summer months play a role. Last week, the discovery of a negative first-quarter GDP did not shock the market influencers, as common-sense seekers attempted to reconcile the impact of a negative GDP on future corporate profits. Certainly, drivers of GDP can be attributed to healthcare spending or the brutal winter, yet the corporate profit has not collapsed, explaining why share prices are near record highs.

The mind-numbing connection between the real economy and stock market drivers can either confuse plenty or recreate a new wave of optimists (or latecomers). Importantly, the message from the Fed boldly states that rates are set to remain low; thus, the status-quo fanatics are roaring with taking risks and not fearing recession. On the other hand, the worrisome bunch is left stranded on either missed prior opportunities or tame volatility – at least for now. Certainly, the consensus anticipates a recovery in GDP numbers in the second half of 2014, and labor numbers are touted as successes rather than emphasizing weak wage growth. Perhaps, the labor numbers this week can add further clarity if the thought of a second-half economic recovery has merits.

Limited power

Increasing collective confidence in central banks might be carried overboard when growth rates are expected to regain momentum along with job creation. Frankly, the real economy awaits policies and innovations that have been sparse and not quite robust. Money managers have struggled to assess the risk of a market top for a long while. Clues are not wrapped with warnings and known disclaimers, as the low-volatility period continues to feel abnormal– as if the market rhythm is broken. Certainly, trading revenue for financial services is struggling and performance is tricky to manage in this climate. How much power is afforded to the Fed? Some issues of small business growth, demographics, organic growth and business-friendly legislation are not all in the hands of the central bank. Thus, liveliness in real-economy growth is eagerly and desperately awaited. Surely, one day, attention will focus on real growth rather than intellectual justification of an elevated market. Thus, a surprise is awaited, and the reward for guessing is attractive today as much as prior periods in this bull market.
Articles Quotes

“In its continued push to make the yuan a global currency, China's central bank said Sunday it plans to designate clearing banks for its currency in Paris and Luxembourg, as the two financial centers battle with London to become the leading European offshore yuan-trading city. The People's Bank of China announced the move in two separate statements Sunday. It didn't say when it would designate the clearing banks. The French and Luxembourg central banks said Sunday they had signed agreements with PBOC allowing for greater cooperation in the oversight of their domestic yuan market. The weekend moves are the latest salvos in the race to win a major share of business in cross-border transactions in the Chinese currency. Singapore and Sydney are also vying for a significant share of the global yuan market, which is expected to expand rapidly along with China's fast-growing economy. … Luxembourg, home to a powerful asset-management industry, has built strong ties with Chinese investors in recent years and currently hosts the European headquarters of China's three leading banks. Last year, former Luxembourg Finance Minister Luc Frieden cited figures showing that the country was the leading center for yuan business in the euro zone, with some 40 billion yuan in deposits, 62 billion yuan in loans from Luxembourg banks and 220 billion yuan under management in the fund industry. For China, the move to allow the yuan to be used more freely abroad aims to boost demand for the currency and reduce the amount of dollars entering the country. China still maintains a tight grip on the yuan's value, with its trading strictly controlled in the mainland market.” (Wall Street Journal, June 29, 2014)


“Initial public offerings priced from January 1 to June 26 were worth $26.5 billion. This was up from $5.7 billion in the same period last year and 123% higher than the same period in 2007, which at $11.9 billion was the previous record since Dealogic started recording the data in 1995. Piers Coombs, head of UK equity capital markets at Canaccord Genuity, said the combination of improved sentiment in the equities markets and a desire to launch IPOs before the ‘political risk’ of the UK general election, due by May 2015, had helped drive flotation activity in London. He said a busy first quarter had been followed by some ‘indigestion’ in the second. He predicted the market would be back on ‘an even keel’ over the third quarter. Among shares that have underperformed since flotation by their private equity sponsors in recent months are motoring organisation the AA, over-50s holiday and insurance group Saga (both backed by Permira, CVC Capital Partners and Charterhouse Capital Partners), online travel firm eDreams Odigeo (Ardian and Permira) and retail chain Pets at Home (Kohlberg Kravis Roberts).” (Financial News, June 30, 2014).

Levels: (Prices as of close June 27, 2014)

S&P 500 Index [1960.69] – A recent move from 1860 to 1960 triggered potential re-acceleration of the bullish run. Yet, 1960 marks a hurdle for the index in the near-term based on the last three days of last week.

Crude (Spot) [$105.74] – The recent spike is now slightly pausing. Certainly, the move from $100 to $107 reawakened the sensitivity of oil prices when it comes to turbulence in the Middle East. Yet the justification of this move needs some tangible follow-ups.

Gold [$1311.75] – Questions remain: Is $1280 a sustainable bottom? Or is the break above $1300 a critical momentum-builder for buyers? For now, mild positive momentum has been visible in the last month, and the start of July should provide further answers.

DXY – US Dollar Index [80.36] – Since June 11, the downtrend in the dollar has been quite visible. Any break below 80 may signal a new wave of currency weakness.

US 10 Year Treasury Yields [2.53%] – Once again, surpassing 2.65% has proven to be difficult and the very low rate environment is playing out again. May lows of 2.40% are on the radar as annual lows, and the next moves in upcoming trading days can trigger directional hints.


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