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Capital markets globally continued to focus on the potential for a US credit downgrade if politicians in Washington DC were unable to vote on a debt ceiling increase.  The increase of the debt ceiling will allow the Treasury to avoid defaulting on payments which begin on August 2, 2011.  Equity markets declined by approximately 3.5%, as investors exited positions due to the current uncertainty.  Meanwhile the VIX skyrocketed during the week as fear plagued investors driving capital into safe haven assets.

The key economic data point at the end of the week was the disappointing GDP release.  Not only was the 1.3% year over year increase less then expectations, but the revision to the first quarter was eye opening.   A main reason behind the downward revision in first-quarter growth was that the inventory buildup by companies was less than initially estimated, while outlays by the federal government and consumers were also revised down. Economists surveyed expected GDP to rise 1.8% in the second quarter.   Additionally, supply chain disruptions from the Japanese quake continued to spill over into car manufacturing which was down substantially.

Additionally, manufacturing data was uninspiring.  The Chicago PMI slowed to a reading of 58.8 in July from 61.1 in June. Economists polled had expected a 61.9% reading. Indexes for production and new orders fell, while order backlogs bounced back into positive territory.

Fear permeated investor sentiment taking the VIX higher by more than 42% on the week.  The VIX quickly moved through resistance at the beginning of the week, slicing through the 50-day and 200-day moving average.  The volatility index tested the 200-week moving average touching 26%, at one point on Friday morning.  A break of the 27 level will likely see a test of the 31 level reached in March during the Japanese natural and nuclear disaster.

Heavy volume in the iShares Small Cap Fund (IWM) on Friday. Shares are down $ dipping below a 200-day exponential moving average after this week’s 5-day 6.2 percent losing skid. Total options volume in the small cap fund was very heavy. Aug 82 and Sep 87 calls are the most actives, after one player paid 20 cents for the 1X2 ratio spread. Another noteworthy trade is in the Sep (Quarterly) 72 – 77 put spread at $1.40, 36000X. Meanwhile, implied volatility in IWM is up 5.5 percent today to 29.5 percent and up 43.9 percent on the week.

Interesting flow in the weekly options that expire next Friday and therefore include the potential US default event. On the stock side call buyers appear to dominate, with BAC 10 and 11 strike calls trading actively and AAPL and RIMM upside calls busy in offer-side flow with increasing IV. On the ETF side the volume is in the puts, with SPY 128 strike puts for 8/5 expiration leading the list.

Sentiment in the riskier asset space remained on the defensive despite a mixed US equity markets on the heels of better than expected economic data. The markets welcomed a solid jobless claims report along with robust pending home sales. Earnings in the US continued to show signs of growth, also Exxon disappointed the street, pushing the energy space lower. The VIX continued to remain strong after rising 5 points or more than 28% so far this week.

The investor community continued to watch the haggling over the debt ceiling between the Democrats and Republican. Housing Speaker John Boehner continued to try to gain momentum to attain the 240 votes needed to pass his plan through the House. The House Republicans continue to move forward despite warning from Harry Reid, the Senate Majority Leader, that the bill will not make it through the Senate.

Business leaders are beginning to take some action, and wrote a letter to every member of the congress. The CEOs of more than a dozen big Wall Street financial-services firms issued a letter Thursday urging Congress to break the stalemate, and warning that a default would be a tremendous blow to business and investor confidence.

In economic news, Initial Jobless claims fell by 24,000 to 398,000 in the prior week, according to the Labor Department. The number of jobless claims fell below 400,000 for the first time in the past 3.5 months. Economists surveyed had forecast claims to remain unchanged. The four-week moving average of claims, also fell last week, by 8,500 to 413,750.

In the housing sector pending home sales increased by 2.4 percent which followed an 8.2 percent May gain, according to the National Association of Realtors. Economists forecast a 2 percent drop. Pending sales rose 17 percent from June 2010.

On the earnings front, Exxon Mobil Corp.’s second-quarter profit jumped 41% as the company benefited from high oil prices and improved refining and marketing results. Exxon reported a profit of $10.68 billion, or $2.18 a share, up from $7.56 billion, or $1.61 a share, a year earlier. The company missed analysts’ earnings expectations of $2.33 per share due to weaker than anticipated results in both its international production.

There were some impressive options trades on Thursday. The iShares FTSE China 25 Index Fund (FXI) moved higher and 75,000 Nov 46 calls were bought on the ETF at an average of 96.5 cents per contract. The trade looks opening and tied to 1.4 million shares at $42.55. The Nov 46 calls on the China fund are 8.1 percent OTM with a delta of .29. 83,424 traded against 9,715 in open interest. Today’s buyers is likely anticipating a short-term rally in China’s equity markets and taking a new positions in the contract. FXI has added 3.3 percent since 7/18, but is down 6.1 percent since May when it closed the month trading for $45.37 per share.

 

For the week equity markets are down, and the VIX continues to show strong gains. The VIX blew through both the 50-day and 200-day moving averages, on route to the largest up move in the past year.

Equity markets in the US were under pressure for most of the week as riskier assets were driven by testimony from Ben Bernanke in his Humphrey Hawkins testimony, European debt issues, earnings and the constant standoff on the US debt ceiling.  Volatility remained at a high level, moving through the 20% level, as investors remain on high alert.  The majority of economic data released on Friday continued to show that the US is still feeling a “soft patch”  Manufacturing numbers and sentiment failed to lift investor confidence.  Earnings were the bright spot for US stocks.  Google drove the Nasdaq 100 higher, and solid banking releases from Citi and JP Morgan helped lift the DOW and S&P 500.

Inflation data was mixed with CPI lower than expected on a headline number but more than forecast on the core.  Consumer prices fell 0.2% from May, according to the Labor Department.  That followed a 0.2% increase the prior month.  Core CPI, which excludes food and energy climbed by a monthly 0.3% in June, matching May’s rise.

Industrial production rose 0.2%, according to the Federal Reserve.  Capacity utilization moved to 76.7% the same as in May.  Additionally, Empire State Manufacturing Index in July contracted sharply for a second straight month, well below expectations.

Volatility had remained high prior to the European banking stress tests which was released around noon on Friday.  The report showed that eight banks failed the European Union’s “stress tests,” with a combined shortfall of 3.54 billion in capital under a simulated worst-case economic scenario.  The report also showed that another 16 banks narrowly passed the tests out of a total of 90 top lenders across Europe.

The VIX started the week near 18 and moved higher testing the 22 level, before moving lower toward 19.50, as equities rallied late in the trading session.  During the week the index tested the 200-day moving average near 18.50, and held to eventually climb higher.

Crude oil surged higher driving energy equities higher.  Southwest Energy (SWN) shares are up nearly 8% and rallying along with other names in the oil/gas space after BHP made a bid for Petrohawk (HK). Options in Southwest Energy are heavily traded as well.  19K calls and 10K puts.  Typical volume in SWN through midday is about 4,150 contracts.  Implied volatility in SWN options is up about 8 percent to 32.5.

Citi reported a better-than-expected profit $3.34 billion compared with $2.7 billion a year ago.  Overall costs increased 9% at Citigroup, to $13 billion, and expenses at the Citicorp unit rose 10%, to $10 billion. Revenue for Citigroup overall fell 7%, to $21 billion, and revenue at Citicorp fell 1%, to $16.3 billion.

A large block of calls on Microsoft printed in the afternoon on Friday, as a large institutional client bought 50,000 Jan13 32.5 calls for $1.10, outright, as shares traded near $26.84.  While a number of large long-dated upside call blocks have printed in MSFT since the term was listed last September, this is the largest individual block so far.  With MSFT testing resistance near the 27 level, bullish bets are lining up to test further upside.  Next week earnings will pick up and create additionally options opportunities.

Equity markets in the US continued to consolidate and were unable to gain momentum after Wednesday’s dovish testimony from FOMC Chairman Ben Bernanke.  Despite better than expected economic data and solid earnings from JP Morgan Chase, volatility continued to rise with the VIX moving above 21, to reach the highest level of the 3rd quarter.

The VIX volatility index continued to trade above both the 50-day moving average and the 200-day moving average, as investors continue to fear the potential for a US default if congress does not lift the debt ceiling.  The VIX closed up more than 1 volatility point, climbing more than 6% on the day.  Compared to the beginning of the week, the VIX is higher by 30%.  Additionally, volatility on crude oil prices rose spiked to 35 from 32, a 10% climb, a crude oil prices plunged during Bernanke’s testimony to the senate.

July 25 calls on the volatility index are among the most actively traded. One investor bought 20,000 at 20 cents each.  50,800 traded.  The premium purchases are possibly short-term bets that market volatility will remain high over the next few days. VIX July options expire next Wednesday. Open interest in the contract is 205,553 and the second largest in VIX (behind Jul 30 calls).

The FOMC Chairman somewhat backed off his dovish position stating that the central back was not prepared to take any further immediate action.  The Chairman told a senate committee that the situation was complicated and that current inflation was higher than desired, and although transitory in nature, currently create an environment were increasing purchases of assets, might not attain the desired effect.

US economic data helped initially lift the US equity markets, but comments from FOMC Chairman Ben Bernanke put a cap on upside momentum.  Jobless claims dropped 22,000 to a seasonally adjusted 405,000 in the week ended July 9, according to the Labor Department.  The prior week’s claims figure was revised to 427,000, up from an originally reported 418,000. Economists surveyed had forecast a decline of 3,000 new claims in the latest week.  The four-week moving average of new claims, fell by only 3,750, to 423,250.

Additionally, Retail sales rose by 0.1% from the previous month to $387.79 billion, according to the Commerce Department.  Economists surveyed had forecast a 0.2% drop in June retail sales.  The small June increase followed May’s 0.1% decline, which was revised up from an originally estimated 0.2% decrease.

JP Morgan (JPM) Jul 40 call is the most actively traded equity option Thursday, as shares rally around earnings news.  JPM reported a second quarter profit of $1.27 per share on $27.41 billion in revenues. Analysts were expecting $1.20 on $25.26 bln. 36,000 calls and 15,000 put traded in JPM during the first ten minutes.  Implied volatility in the options is down 17 percent to 26.5, compared to a 52-week high and low of 36.5 and 17.5.

In after hours action which should shape technology trading tomorrow, Google surged more than 10% after beating earnings and revenue numbers.  Volume in after hours trading was very robust.  Google earned $2.5 billion, or $7.68 per share, in the April-June period.  That’s a 36 percent increase from $1.84 billion, or $5.71 per share, a year ago.  The figured topped the average analyst estimate.  Revenue increased 32 percent to $9 billion.  After subtracting Google’s advertising commissions, revenue stood at $6.9 billion.  That also beat analyst projections.

Equity markets in the US were lower and implied volatility continued to climb, after the Fed released its minutes from its last meeting.  Gold prices surged testing resistance near the 1575 all time high.  A successful Italian bond auction also allowed the Euro to rally off its lows, helping the US markets gain some traction.  Late in the trading session, Moody’s announced a downgrade of Irish debt.

Trade Balance deficit widening to $50.2 billion in May, up from $43.6 billion in April.  Economists were looking for a smaller increase to $44 billion.  The FOMC minutes were released at 2:00 Eastern time, the text showed that officials stand ready to offer more policy easing if needed.

The VIX started the week moving higher, as the market faced a deluge of selling on Monday.  The implied volatility index pushed through the 50 and 200 day moving average and continued to press higher on Tuesday.  The two day climb of 3 implied vols to nearly 19 is a 19% rise.  Resistance is seen near the June highs near 22 and 25, and then the March highs near 31.  Support on the VIX is seen near 18, which is the 50 day moving average.

Financial shares buoyed the equity markets.  MBIA (MBI) shares are rallying and leading the mortgage related names (PMI, MTG, AGO, RDN, XL) higher today.  Shares are up 7.7 percent to $9.11 after the company agreed to drop a lawsuit against BofA and Merill.  MBI options are seeing heavy trading as well.  The top trade is a 2500-contract block of Jan $10 calls at $1.50.  Total volume is 19,000 calls and 3,100 puts in MBI and implied volatility in the options has jumped 20 percent to 78.5.  Additionally, news that Fannie and Freddie could rent inventory instead of holding it and selling, boosted these stocks.

In other bullish flow, Research In Motion (RIMM) moved higher to $28.45 and RIM’s Jul 30 call is one the most actively traded equity options contract trading.  Some of the action includes spreads.  The Jul 29 – 30 call spread traded at 24 cents, 392X on ISE. Some players might be initiating bullish trades in the Blackberry-maker in anticipation of new information at the company’s Annual Shareholder meeting Tuesday.

Trina Solar (TSL) was an implied volatility Mover down $2.97 to $16.79 and implied volatility in TSL options is up amid increased put volume.  25,000 puts and 12,000 calls traded in the Changzhou, based solar energy company.  Meanwhile, implied volatility in TSL options surged 80 percent to 96 after the company announced that an independent director and chairman of the audit committee has resigned from the board and the audit committee.

Delta Airlines (DAL) options were heavily traded Tuesday, as shares fall to new 52-week lows.  The top trades of the day are in the 2013s after the 12.5 – 17.5 call spread trades at 65 cents, 3000X.  The spread looks opening and possibly a bet that shares will rebound through the second half of 2011 and in 2012.

US equity markets were higher despite weaker than expected Challenger confidence figures and ISM non-manufacturing numbers.  European markets dragged on the US, as investors continued to punish peripheral yields with an emphasis on Portuguese debt.  The increase in Yuan rates also took its tole on Asian equities.

Non-manufacturing purchasing managers’ index fell to 53.3 in June from 54.6 in May.  Forecasters surveyed had expected the June PMI to drop to 54.0.  The decline on the heels of a better than expected ISM manufacturing index.  Market participants will be eyeing US employment released by ADP on Thursday and the BLS on Friday.

The European currency along with equities declined as Portuguese bond prices plummeted after Moody’s downgraded the country to junk status, disqualifying the country from an index of sovereign debt and triggering a selloff.

The PBOC, China’s raise its benchmark deposit and lending rates by 0.25 percentage point, the third increase this year and the fifth in the latest round of tightening.  China has emerged as a key driver of global growth as the U.S. and Europe remain mired in tepid recoveries and Japan continues to suffer from the effects of the March earthquake and tsunami.

VirnetX Holding (VHC) rallied amid heavy call volume and increasing implied volatility.  Shares are up $4.10 to $36.74 and 27,000 calls/5,160 puts traded in the name.  July 40 calls, which are now 8.8 percent out-of-the-money, are the most actives.  4,426 trade, with an even split hitting at the bid and offer.  Dec 45, July 35, Dec 40, and July 32 calls are the next most actives.  Meanwhile, implied volatility in VHC options rallying up 24 percent to 80, indicating the options market expects additional volatility for VHC shares in the days/weeks ahead.

Equity markets in the US consolidated as increasing commodity prices helped offset a downgrade of Portuguese debt by Moody’s Investors Services. Moody’s downgraded Portugal’s debt to “junk” status, by the equity markets took the news in stride. Market participants are awaiting Friday’s employment data and the prequels which include the ADP Private Employment report and the jobless claims data.

Moody’s, which has had numerous downgrades and the warnings of late, cut Portugal’s long-term debt rating four notches, to “Ba2,” junk-bond territory, from “Baa1.”  It also downgraded Portugal’s short-term debt rating, to “not-prime from “prime-2.”

In economic news, U.S. factory goods orders climbed by 0.8% from the prior month to $445.29 billion, according to the Commerce Department.  The increase was broad-based, with gains in a variety of industries.  Economists surveyed had forecast a 1.0% rise in overall factory orders.  Capital investment on equipment by U.S. businesses went up strongly and non-defense capital goods orders excluding aircraft, increased 1.6%.

Crude oil prices surged higher as commodity prices rebounded from their recent slump.  Heavy volume in options on Williams Companies with calls leading the flow saw unusually high volume.  Feb 40 calls lead the list with a buyer of 15,000 for 46cents on the NYSE-Arca (old Pcoast) exchange.

The commodity price increase also helped Bunge (BG) moved higher and options action increased for  the White Plains, NY agricultural company.  4,123 calls and 1,270 puts so far, which is 3X the expected for a session.  The top trade appears to be an Oct 65 – 72.5 bullish risk-reversal, bought at 90 cents, 750X.  October 80 calls are the most actives.  2,389 traded (89 percent Ask).  Open interest is sufficient to cover, but the overall flow seems to reflect expectations that Bunge will bounce from now through mid-October.

Unusual options activity surfaced in Hanesbrands (HBI).  Shares add 54 cents to $29.99 and options volume ran 15X the average daily, being driven by Aug 30 call buyers.  2,248 contracts traded (70 percent Ask) against 42 contracts in open interest.  Implied volatility is up 7 percent to 37.  Shares have performed well lately, up 11.3 percent since June 16.  Next earnings slated for mid to late-July.

The decline in the Euro acted as a negative on the momentum of US equities.  Euro-zone economy lost momentum at the end of the second quarter and retail spending fell sharply, even as the European Central Bank prepares to raise interest rates again.  Growth in the private sector of the 17-nation currency bloc slowed to its weakest in 20 months.

The composite PMI for countries using the euro fell to 53.3 in June, the weakest since October 2009, from 55.8 in May.  Additionally, the volume of euro-zone retail sales fell by 1.1% in May from April, the largest month-to-month fall since April 2010.

Equity markets in the US enjoyed one of the best weeks in the past 3 years.  The rebound rally on the back of the passage of the Greek austerity vote was broad based, lead by financials and energy stocks.  The rebound in manufacturing also gave investors hope that the feared soft patch was only transitory.

The soft patch within the manufacturing sector appears to be only a blip.  The supply chain disruptions caused by the natural and nuclear disasters in Japan, have seemed to have faded only affecting the economic data points for May.

The ISM’s manufacturing purchasing managers’ index rose to 55.3 in June from 53.5 in May.  Economists surveyed had expected the June PMI to slip to only 51.8.  The ISM’s new orders index rose to 51.6 last month from 51.0 in May, while the production index edged higher to 54.5 from 54.0.  The factory employment index crept up to 59.9 from 58.2.

The passage of the Greek austerity package implementation was another key hurdle, which has in part supported the drastic shift in market sentiment.  Over the past five days the dollar has broadly declined against most of the G10 currencies, with the dollar weakness the most pronounced against the growth-sensitive currencies.  The rally is likely in part due to some type of mean reversion as these currencies were battered from May to early June.  With the worst of the Greece likely averted for the time being the market appears to be looking for a summer risk rally, as the moderation in global growth may lead some central banks to become more cautious in regards to the pace of tightening.  It seems that for the risk rally to continue and just not simply to be based on quarter end repositioning or mean reversion following the contraction in the EZ fiscal stress will require support from positive economic fundamentals.

Although the equity markets continued to climb, there were some stocks that were less fortunate.  Eastman Kodak (EK) July 3.5 call is the most actively traded equity options contact. EK is down to $3.13 and came under pressure after hours Thursday when the ITC ruled against the company in its patent infringement case against Apple and RIM. Shares are down 12.6 percent and 15,787 Jul 3.5 calls have now traded in EK.  The action seems to include a mix of both buying and selling (22% Bid / 23% Mid / 55% Ask ).  The contract is now 11.8 percent OTM and expires in two weeks. 28,000 calls and 14,000 puts traded total in Kodak.  Implied volatility in the options is down 52 percent to 55 now that this important event risk has passed.

Implied volatility during the week dropped substantially as investors sentiment soared and fear moved to the back burner.  The drop in the VIX volatility index to below 16% is the lowest level seen in the index since May of 2011.