Weekly Recap: Summer Finale ends with Fireworks!

– Geopolitics, the Ukraine specifically,
took center stage once again especially through the back half of the week.
Safe haven flows were seen exacerbating the move lower in bond yields and
serving as a headwind to stocks. Any goodwill that was exhibited in the
handshake between Presidents Putin and Poroshenko on Tuesday quickly dissipated
by Wednesday when reports began surfacing that Russian regular army troops were
on the ground in parts of Southern Ukraine helping separatist fighters.
Poroshenko confirmed as much in a press conference on Thursday noting the
situation on the ground had changed significantly. Talks of another round of
sanctions started to brew and rising tensions could be seen in the rhetoric
from Western officials that followed, demanding that Russia cease its military
“incursions.” The Russian Ruble fell to a new all-time low against
the dollar, past 37. The last time it traded near this level was when Russia
seized Crimea this past spring. Separately,
Friday the UK raised its terrorist threat level on concerns about hundreds of
British citizens fighting alongside ISIS in Iraq and Syria could return home
intent on wreaking havoc.

– The headlines
coming out of Europe largely overshadowed the bulk of the US economic data
which showed the rebound in US economic activity is picking up. At 4.2%, Q2 annualized GDP beat consensus
expectations by 0.3%. The elevated inventory levels seen in the advance GDP
reading last month were revised down less than many analysts had expected, but
other parts of the data were more positive for growth going forward. Investment
spending was revised up more than expected, due in part to new Q2 data on
research and development spending. Also an upward revision to business
investment helped boost the Q2 growth rate of domestic demand (real final sales
to domestic purchasers) from 2.8% in the advance report to 3.1%. The August
Chicago PMI came in well above consensus, reaching levels seen back in May on
good growth in new orders. The
Conference Board’s August US consumer confidence touched the highest level
since before the financial crisis, though some view it as a contrarian
indicator. Housing
remains a sore spot, and the existing home sales report posted a surprise
decline m/m making it appear homebuilders may have been a bit too aggressive in
raising prices, but the July pending home sales index still painted
a constructive picture overall.

The US lending
markets appear to be gaining momentum as it works through the scar tissue left
from the financial crisis. The latest
quarterly checkup from the FDIC revealed in the second quarter banks posted the
strongest loan growth since 2007. Net interest income increased nearly 2% y/y
which was the fastest pace in more than a year while overall earnings rose 5%.
Equifax’s National Consumer Credit Trends Report showed that year to date the
total amount of new non-mortgage, non-student loan credit originated has grown
11% reaching a 6-year high of $365B. Coincidently cashing in on these improving
trends, LendingClub, the world’s largest marketplace connecting borrowers and
investors filed its long awaited IPO looking to raise $500M.

– The tail end of Q2 earnings season is coming to a close, and it can’t be over
fast enough for many of the specialty teen retailers, while high end consumers
continue to spend. Guess, Abercrombie, Tilly’s, Gordmans and Genesco gapped
lower after missing expectations and lowering their outlooks. Tiffany’s
quarterly results topped analyst expectations on robust margin improvement and
strong Asia/US SSS, and it also raised FY15 eps targets. In Europe, Hermes and
Ferragamo saw results beat expectations sending their stocks higher. Best Buy
initially moved down after reporting better than expected earnings on improving
profitability in the second quarter. Unfortunately revenues were short of
analyst expectations while SSS decline 2% on weakness in consumer electronics,
mobile phones in particular. Shares rebounded by the end of the week after many
defended the name and also in anticipation of next month’s iPhone 6 launch.

– Roche made an all cash play for Intermune at $74/share, 60% above where it
was trading when the latest round of takeover speculation broke out in late
July. The $8B deal will help Roche expand into the treatment of rare or
incurable diseases. On Tuesday Burger King Worldwide Inc. confirmed it had
struck a deal to buy Canadian donut chain Tim Horton’s Inc. for about $11
billion. Investors welcomed the deal after Warren Buffett got involved in
financing the takeover. Berkshire Hathaway committed $3 billion of preferred
equity financing and 3G Capital will own about 51% of the new company.
Berkshire, which previously joined with 3G to buy H.J. Heinz & Co. in 2013,
won’t have any participation in the management and operation of the business.

– The USD consolidated its recent gains
against the major currencies as it benefited from a divergent view emerging
from the G3 central banks (US, ECB and BOJ) at the Jackson Hole symposium last
weekend. Draghi’s Jackson Hole commentary was viewed as dovish and left the
door open for unconventional instruments including QE. The ECB currently
appears to be in ‘wait-and-see’ mode ahead of the September launch of the TLTRO
program and its potential impact but that could change with upcoming ECB staff
projections. The EUR/USD gapped to an 11-month low below 1.3150 as European
stock trading drew to a close on Friday. The EUR/CHF cross hit its lowest level
since Jan 2013 (1.2050) sparking speculation on how the SNB will defend its
currency floor.

– The Shanghai Composite fell for the
first time in 7 weeks, shedding about 1% to close at 2,217. China industrial
profits growth slowed to 13.5% from 17.9%, weighed down by the mining
sector where profitability contracted 13.2%. The July Conference Board leading
index matched an 8-month high, but resident economists noted “improvement
was driven primarily by an increase in new floor space starts, which is
unsustainable in the longer-term”, adding that bank lending activity
offered its weakest contribution since January 2012. Amid the rising
speculation of greater probability of an easing sometime before the end of the
year, the PBoC boosted its weekly liquidity injection to a net CNY45B from just
CNY11B in the prior week.

– In Japan, the cabinet office maintained its economic assessment of
“moderate recovery trend” intact, but warned about the possibility of
prolonged impact from sales-tax related consumption decline and also cut its
view of corporate profitability. The balance of July economic data remained
largely mixed – the unemployment rate rose for the second consecutive month but
the job-applicant ratio hit a 22-year high. Household spending contracted for
the fourth consecutive month, and the leading Tokyo core CPI for August slowed
to a 4-month low. USD/JPY hit a 7-month high near ¥104.30 early in the week
after BOJ Governor Kuroda stated that the central bank might have to pursue its
aggressive monetary policy easing for “some time” to fully vanquish
deflation. Late next week, BOJ will announce its policy decision, and PM Abe
will unveil the details of cabinet reshuffle on September 3rd.