Weekly Trading Recap | Fireworks at ECB & FED kick-off the first week of the Fall

– The August US jobs report disappointed markets on Friday with a sizable miss
in the nonfarm payrolls (+142K v +230Ke). The NFP was the lowest reading in
2014 so far and broke a six-month stretch of 200K+ monthly gains, the longest
run seen since the late 1990s. Commentators noted that the August data has the
greatest chance of being revised higher due to seasonal factors, and many
analysts suggest the final estimate will rise to the upper half of the 150-200K
range. In addition, over the last 12 years or so, every NFP print over +300K
has been followed by one near or under +100K, suggesting that the July/August
data are following a well-established pattern.

– Coming into the week, the situation in Ukraine was going from bad to worse,
with reports indicating more columns of Russian tanks and troops were entering
the country to reinforce pro-Russian separatists in their offensive against
government forces. On Wednesday Russia President Putin and Ukraine President
Poroshenko restarted diplomacy that had broken off a week before, agreeing to
discuss another ceasefire on Friday. It was not lost on anyone that Putin’s
overture came as the planned NATO summit convened in Wales. Ahead of the
confab, US President Obama reiterated the alliance’s defense commitments to its
eastern members, and at the summit NATO finalized agreements for more aid to
Ukraine and leaders said more sanctions on Russia are imminent. On Friday, Kiev
and the separatists agreed to a temporary ceasefire and talks continue for a
more enduring truce.

– Shares of BP dropped sharply on Thursday, pulling the FTSE lower with it,
after a US judge ruled that the company was grossly negligent in the 2010
Macondo oil spill. Recall that BP has already agreed to pay $13.7 billion in
fines for the Gulf of Mexico spill, but the “gross negligence”
finding means BP could face quadruple damages and a maximum of $18 billion in
additional fines. Transocean and Halliburton were found to be partly culpable
but cleared of gross negligence in the case.

– August auto sales were mostly beat expectations, highlighted by Chrysler’s
sales up 20% y/y. The overall industry continues to see sales volumes recover
to levels last seen before the recession. A Ford sales executive said the
industry is very strong at this stage in the US economic recovery, with August
industry SAAR running around a mid-17M unit annualized rate, the best rate
since 2006.

– Homebuilders Toll Brothers and Hovnanian both beat expectations in third
quarter reports out this week, and both firms saw very good y/y gains in
revenues and profits. Toll Brothers narrowed its FY14 guidance for expected
deliveries and said ASPs would be higher than expected, sending the company’s
shares lower. Hovnanian did not offer guidance, but its metrics for the quarter
were pretty solid, with the backlog up by double digits.

– According to press reports, Alibaba plans to kick off its IPO roadshow in New
York City starting on Monday, Sept 8th. On Friday, the IPO pricing range was
set at $60-66/ADS implying a valuation around $150 billion (similar to the
market cap of Amazon). Alibaba is expected to price the IPO on Sept 18th and
begin trading its shares on the NYSE on Sept 19th.

– In M&A, two large deals were announced on Tuesday. Norwegian Cruise Line
Holdings agreed to acquire Prestige Cruises International Inc. in a deal valued
at about $3.03 billion. Prestige is owned by PE firm Apollo Global Management,
which also has a 20% stake in Norwegian. Compuware reached a tentative deal to
sell itself for $2.5 billion to PE fund Thomas Bravo. Compuware had been under
pressure from activist investors to cut costs, lay off staff, and solicit
buyout offers for more than a year.

– The ECB policy decision on Thursday slammed the euro, driving the biggest
one-day decline in EUR/USD since October 2011, with the pair dropping to 1.2920
from 1.3150. EUR/USD spent all of Thursday and Friday below 1.30. EUR/CHF
tested 1.2045, getting as close to the SNB floor as the pair has been since it
was established in September 2011. The pound was softer as traders positioned
nervously ahead of the Scottish independence referendum scheduled for September
18th. A YouGov poll out this week suggested that support for Scottish
independence had risen eight points over the past month, dangerously close to
the 50% threshold. Analysts pointed out that a significant GBP risk event could
unfold as UK economic data has begun to soften across the board.

– USD/JPY hit 6-year highs late in the week after Japan PM Abe offered LDP
deputy policy chief Yasuhisa Shiozaki the Health Minister cabinet post,
sparking hopes of early GPIF pension reform. Shiozaki has been the LDP’s
largest proponent of GPIF pension reform including diversification into more
domestic equities and foreign securities and away from domestic bonds.

– The Bank of Japan maintained its assessment for the 13th consecutive meeting
that “economy continued to recover moderately as a trend”, and
despite some speculation of a more upbeat language, it largely stuck to the
familiar script. The only change in the latest BOJ statement was a downgrade on
the property market, noting the “decline in housing investment following
front-loaded increase has continued.” Also of note out of Japan, wage
inflation is finally accelerating more meaningfully, with the latest data out
of Labor Statistics showing July cash earnings growing by 2.6% y/y – the
largest increase since 1997. This should provide some welcome relief to
Abenomics, just as the cabinet approval ratings for PM Abe also headed higher
following this week’s cabinet reshuffle. Late on Friday, Japan’s Economy
Minister Amari pledged more caution in the government’s expected December
decision on whether to proceed with another round of sales tax hikes.

– China PMI figures showed the economy diverging in favor of the services
sector, which would be in line with policy objectives in Beijing. Official
non-manufacturing PMI rose for the first time in 3 months to 54.4 from 54.2,
while HSBC services PMI hit a 17-month high of 54.1 following an alarming
record low of 50.0 print in July. In contrast, the official manufacturing PMI
slowed for the first time in 6 months to 51.1, and the final HSBC manufacturing
PMI fell to a 3-month low. HSBC chief China economist was cautious on both
measures, noting subdued domestic demand and considerable downside risks to
growth in the second half of 2014 related to the property sector slowdown
justifying expectations for more easing measures to support the recovery. The
Shanghai Composite was bid higher by an impressive 4.9% this week – the biggest
gain since early 2013 and the highest level for the index in 15 months.