Day Trading Weekly Market Update: The New Market’s Neutral

We traded through OPEX-Week in our Live Trade
Room and had another profitable week of trading Crude Oil, Gold, and the E-mini
Russell.

The markets continue to provide us with trading
opportunities, and here’s what happened in the news this 3rd week of May, 2014.

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– Aggressive buying in government
bond markets had many wondering if they should pay heed to warnings of a
potential short squeeze this week.

The action in US treasuries
knocked the S&P-500 off of all-time highs and sent the 10-year benchmark
yield as low as 2.472%, matching the lows seen last October.

A panicky reaction to weak
European GDP numbers and a trial balloon in Athens regarding possible
retroactive capital gains taxes on bond sales sent the 10-year bund yield
momentarily below 1.30%.

In addition, weak April China
industrial output and fixed asset investment data also added to the scramble.
The equity slide was more muted in Europe and Asia, and by Friday most US and
global indices rebounded driven by options expiration.

PIMCO chief Bill Gross made his
mark on the week publishing his big new call on the next phase for the global
economy: the ‘New Neutral,’ featuring “low returns but less downside risk
than expected and an end to bull markets as we’ve known them.”

For the week, the DJIA lost 0.6%, the S&P500 slipped
less than 0.1% while the Nasdaq added 0.5%, breaking the tech heavy index’s
three week losing streak.

April wholesale prices measured by the core PPI
index were up to 1.9% from 1.4% in March, for the biggest m/m increase in the
series since September 2012. At the same time, an NFIB’s survey of
small-business optimism for April showed sentiment at its best level since
before the recession began in December 2007.

– Big retail chains Walmart, Macy’s and Kohl’s offered disappointing first
quarter numbers, but after seeing countless earnings reports out over the last
month citing the deleterious impact of winter weather on business, this comes
as no surprise. On the other hand, former retail basket case JC Penny reported
its second consecutive quarter of comp growth after nine straight quarters of
decline. 

Weather was no excuse for the weak April US advance retail sales
report’s scant 0.1% gain, although the March numbers were revised to 1.5% from
1.1% prior, making the month’s advance the biggest gain in the series in four
years.

– Deere cut its equipment sales outlook for 2014 and its outlook for certain
regional sales. Note that in its first quarter, agricultural equipment net
sales declined 12% y/y. Net profit and revenue fell on a y/y basis, although
earnings declined less than expected. According to Deere, the agricultural
economy remains in a relatively healthy condition but farm income is forecast
to be lower than last year.

– After several quarters of offering weak guidance, Cisco managed to post
better than expected Q3 results and solid guidance for Q4. Nevertheless, as
emerging markets challenges persist, the company still forecast a y/y decline
in Q4 revenue even if it managed to top its own guidance and consensus targets.

– On Thursday, the FCC voted 3-2 to adopt new rules for governing broadband
internet service. As written, the proposals would allow ISPs to enter ‘paid
prioritization’ deals, giving some firms a ‘fast lane’ to customers, while also
specifically prohibiting them from knowingly slowing data. 

The proposed rules
are open to public comment for four months before a final vote, and the
comments came fast and furious after the vote. Big telecoms seemed fairly
content with the new structure, while a broad spectrum of large and small tech
firms condemned it, claiming that it effectively gutted the principle of net
neutrality.

– Hillshire Brands reached a deal to acquire Pinnacle Foods in a cash and stock
transaction valued at $6.6 billion, including Pinnacle’s outstanding net debt.
The combined company would have about $6.6 billion in annual sales and maintain
leading positions in frozen and refrigerated grocery categories. 

Deal making in
the healthcare sector continues unabated: Kindred Healthcare made an
unsolicited offer to buy Gentiva Health Services for about $514 million in cash
and stock, and Abbot said it would acquire Latin American company CFR
Pharmaceuticals for $2.9 billion.

– Only a portion of India’s 550 million votes have been counted after national
elections held over the last several weeks, but as of Friday the Indian
National Congress, which has dominated for most of the post-Independence era,
conceded the contest to Narendra Modi’s Bharatiya Janata Party (BJP). 

The BJP
will hold at least 272 out of 543 seats in parliament, meaning it could rule
alone without a coalition government, the first party to do so since 1984.
Rumors that Modi had won a supermajority drove India’s Sensex up 6.1% early on
Friday, before the index gave up most gains.

– Last weekend’s ‘independence’ referendums in Eastern Ukraine came and went
without much impact (most notable was the very tepid reception they got in
Moscow), and this week there has been a distinct feeling that most parties
involved in the crisis are looking for ways to de-escalate. There has been more
troubling violence, but also late in the week thousands of steel workers and
miners came out into the streets in the East in support of a united Ukraine and
to help local police impose order.

On the energy front, Putin insisted that Russia would
still demand prepayment for Ukraine gas deliveries starting June 1st,
even as both sides appeared to be working for a solution to the gas
question. Negotiations between Russia, the EU and Ukraine on Ukraine’s
outstanding bill and future rates for gas are slated to take place on Monday,
May 26th, and Russia PM Medvedev said the Kremlin is ready to talk about terms
of payments if at least part of the nation’s gas debt is paid.

– Tensions between China and its neighbors flared up this week after China
placed an oil rig near the Paracel Islands – claimed by both Hanoi and Beijing
– and began building an airstrip on one of the islands. There were reports that
Chinese ships rammed Vietnamese coast guard vessels attempting to patrol near
the oil rig. The actions triggered widespread protests in Vietnam that heavily
damaged foreign factories, some run by Chinese firms but also a few run by
Taiwanese and South Korean companies. Taiwan tech manufacturer Hon Hai – which
manufactures Apple’s iPhones and iPads, among many other mobile devices – told
its workers in Vietnam to take a three-day leave of absence beginning on
Saturday.

– On Tuesday morning, reports made the rounds that the Bundesbank was finally
giving a green light to ECB stimulus action in June if 2016 inflation forecasts
were lowered. EUR/USD came into the week around 1.3760 and plummeted to 1.3700
on the news. The Buba pooh-poohed the report, calling it nothing new, but in a
major policy speech the next day Bundesbank President Weidman acknowledged that
there was a slight deflation risk at the moment and said he would support ECB
action if it was needed. Weidman stopped short of endorsing QE, calling it not
the best solution to deal with low inflation.

– Advance Q1 GDP data from several European states and overall Eurozone advance
GDP report were pretty weak. Besides Germany and Poland, every European state
that reported missed expectations and all the peripheral states reporting saw
negative q/q growth. Analysts said that the disappointing data will be another
element pressuring the ECB to act in June to keep growth on track and fight
deflationary risks.

– Cable hit one-month lows under 1.6750 after the Bank of England quarterly
inflation report was a bit dovish, diminishing the risk of an early rate hike.
The BOE left its growth and inflation forecasts broadly unchanged, meaning a
rise of its main benchmark rate is still expected in the first half of 2015.

– The Shanghai Composite hit a two-week high above 2,050 on Monday but quickly
retreated on the heels of an underwhelming set of economic data on Tuesday.
China Industrial output growth of 8.7% missed the 8.9% consensus, while fixed
asset investment YTD growth was the slowest on record at 17.3%, below the 17.7%
estimate.