Happy Holiday – 2015 at the Halfway Point

The first half of 2015 has come and gone, and the long-running global bull market has significantly faltered. 

The Dow Jones Industrial Average fell 1.4% through the first six months of 2015, the first time the index has lost ground in that time frame since 2010. The S&P 500 eked out a 0.2% gain in the first half, its smallest H1 gain on record, and ended Q2 down 0.2%, after nine consecutive quarters of gains. The Nasdaq and the Russell 2000 looked much better: the Nasdaq sustained a 5.3% gain in the first half and a 1.8% advance in the second quarter, boosted by gains from record-breaking biotech M&A deals. The Russell 2000 added 4.8% in the first six months of the year. The Shanghai Composite rocketed 60% from January to its June peak, but has since plunged 17%, leaving it up about 33% in the first half. The 10-year UST yield ended Tuesday at 2.35%, rising about 40 bps during the quarter, the most in two years and ringing up the first quarterly loss for treasury bonds since 2013.

The Labor Department’s June employment report marked the 57th consecutive month of US job growth, however there were sour notes in the data. Total nonfarm payrolls expanded by slightly less than expected (+223K v +233Ke) and the labor force participation rate declined to 62.6%, its lowest level since October 1977, after touching a four-month high of 62.9% in May. After a tick higher to 5.5% in May, the unemployment rate dropped to 5.3% in June, reflecting the lower participation rate. The April and May nonfarm payrolls were revised lower by 60K jobs. Responding to the data, Goldman Sachs Chief Economist Jan Hatzius said despite the downsides in the report he still expects to see the first Fed rate hike in December. In speeches out before the report, dovish Fed governor Dudley and the hawkish Bullard agreed that rate hikes were still very much on the table for the September FOMC meeting. 

Inventory reports for last week indicated that US crude oil stocks returned to growth after draw-downs to meet elevated summer demand. Expectations ahead of the Energy Department’s weekly report were projecting the ninth consecutive week of draw-downs, however inventories grew sharply. In a sign that the US production cutbacks in response to lower prices may be subsiding, the Baker Hughes total US rig count saw its second straight week of modest gains, and the oil rig count rose for the first time this year.

US June auto sales saw some notable misses, with the big three all seeing small-than-expected sales gains. Ford and Fiat Chrysler sustained decent y/y increases in sales, +1.5% and +8.2%, respectively. General Motors however saw a 3% drop y/y, widely missing expectations for a 3% gain. Honda and Toyota saw very good gains that beat expectations, while Nissan fell short. 

After months of conflict, the Greece tragedy reached new heights of drama this week: negotiations with the nation’s creditors ground to a halt as PM Tsipras appealed to the citizens of Greece to pass judgement on the creditors’ demands in a public referendum, the ECB froze ELA funding and capital controls were slapped on banks as Greeks lined up at the nation’s ATMs to drain their accounts, and Tuesday’s IMF payment was missed. The CAC and DAX gave up the gains they had seen last week and trading was highly volatile. 

Massive volatility keeps rocking Chinese stocks: on Monday and Tuesday, the Shanghai Composite’s trading range was in excess of 400 points, the highest ever recorded. Over the weekend, the PBoC laid on more stimulus in the form of a 25 basis point cut in interest rates and a 50bp cut in the reserve requirement ratio (RRR) to select lenders. 

Meanwhile in Japan, the BoJ’s Q2 Tankan survey indicated manufacturers are more optimistic than they’ve been since last spring, before the sales tax hike took effect. Big firms predicted the largest increase in capex spending in more than ten years in 2015-16. 

In a national address last weekend, PM Tsipras surprised creditors by declaring a referendum would be held on Sunday, July 5th to allow the Greek people to decide whether or not to support the bailout conditions demanded by creditors. Both Tsipras and Finance Minister Varoufakis have publically supported a ‘no’ vote, while also insisting that the referendum is not a vote on either Greece’s Eurozone or EU membership. Furthermore, its widely expected that a ‘yes’ vote would bring down the Tsipras government and Varoufakis said outright that he would resign in the event of a ‘yes’ victory. The Greeks skipped payment to the IMF due on Tuesday, although the IMF said “in arrears” will be used to characterize Greece’s non-payment rather than “default.” Late in the week, there were press reports that Tsipras had accepted nearly all of the creditors latest demands and also proposed a whole new bailout to be funded via the ESM, but in both cases European officials rejected entreaties from Athens, causing volatile trading in European bonds and equities. Germany’s Chancellor Merkel has declared that negotiations with the Greeks were frozen until after the referendum reiterated that the door remains open for talks and Fin Min Schaeuble remarked that even a YES vote would likely require a whole new set of bailout parameters.

The euro tested three-week lows after the Greek referendum was announced, dropping as low as 1.0960 in early trading, then rocketing back up to 1.1280 on Monday. The pair gradually sank lower through the rest of the week. On Thursday, Sweden’s Riksbank lowered its main interest rate deeper into negative territory and expanded its bond purchases to the end of the year as the turmoil in Greece raised the specter of further krona gains.

Puerto Rico’s ongoing financial crisis has reached a tipping point, drawing some comparisons to Greece. Last weekend, Puerto Rico Governor Alejandro Garca Padilla said the territory could no longer make payments on its $73 billion in debt and would try to reach a deal with holders to implement a possible payment moratorium. There were fears that the island would miss a $1.9 billion payment on Wednesday, on debt owed by power utility Prepa, but the payment was made. Credit default swaps on its bonds jumped to levels close to Venezuela’s. The White House stated that nobody in Washington would consider bailing out the island, but Congressional Democrats tried to advance a bill that would remove the prohibition on Puerto Rico from declaring Chapter 9 bankruptcy. Shares of bond insurers MBIA and Assured Guarantee fell sharply, dropping by double digit percentages.

Iran and the P5+1 group of world powers pushed back their deadline for resolving the nuclear negotiations by a week. The new July 7 deadline was announced amid an air of optimism that a enough progress is being made that deal can get done next week.

The Supreme Court struck down the EPA’s new, more stringent mercury emission regulations, ruling that the Obama Administration unlawfully failed to consider costs when deciding to regulate mercury pollution from power plants. The vote was 5-4, with Scalia writing the majority opinion. Recall that in making the rules, the EPA argued that public health was the only criteria to be considered, not the industry cost of compliance, which the agency estimated at nearly $10B annually. Coal names briefly spiked higher on the ruling, however Peabody Energy cut its Q2 guidance, dragging down the sector through Friday.

ACE Ltd. reached a deal to acquire Chubb in a combined cash and stock deal valued at $28.3 billion. Chubb shareholders will receive $62.93 per share in cash and 0.6019 shares of ACE stock, for a total per-share price of around $124.13/shr, based on the prior day’s closing price. Sysco said it would abandon its $8.2bn takeover of US Foods after the deal was blocked by a federal judge last week. Announced back in December 2013, the merger would have created the largest food service distributor in the US but quickly came under scrutiny from the FTC. Celgene acquired a 10% stake in Juno Therapeutics as part of a wide-ranging cancer treatment partnership, paying $93/shr, a premium of around 100% on the prior day’s closing price. The massive premium attracted mixed comments from analysts, many of whom said Celgene had massively overpaid. Early on Friday, Humana spurned its latest suitor Cigna and wrapped up talks with its preferred partner Aetna, confirming it will be acquired for $37B or $230/shr in cash and stock, a premium of just over 20% from Thursday close.

After last week’s 13% drop, Shanghai Composite shed another 12% in spite of more earnest efforts by policymakers to contain the damage. Over the weekend, PBoC announced a 25bps reduction in key interest rates along with a 50bps cut in RRR for lenders to farming and small business enterprises. Throughout the week, PBoC also maintained an active stance via open market operations, injecting another CNY35B via reverse repos while also lowering the offering yield by 20bps to 2.50%. On the fiscal side, NDRC signaled it is looking at measures to stimulate the rail industry and also assist the struggling coal sector. And in terms of the rapidly evolving financial landscape, policymakers accepted the risk of moral hazard by easing some restrictions around margin requirements widely deemed as a culprit for rapid selling. All these measures are seemingly to no avail, with the Shanghai index now down 29% from its mid-June peak. Late in the week, local press stipulated that active buying may not return unless the regulators lower stamp tax on transactions – a measure that has been more successful in the past. In the meantime, the latest set of PMI figures painted a mixed picture, with the official June manufacturing print at its 4th straight expansion of 50.2 vs 50.4 consensus and services at a 4-month high of 53.8.