Friday, September 16, 2011

Trade The News Weekly market update: Market Week Wrap-up

Trade The News Weekly market update: Market Week Wrap-up

- There has been something of a reversal in sentiment as the choppy, highly volatile trading environment of the last six weeks gave way to impressive, steady gains in global equity markets for five consecutive sessions, even as the Greek situation appeared to go from bad to worse. In Europe, more rumors about sovereign downgrades and imminent, non-specific "announcements" by France and Germany, and reports of poor take-up in Greece's debt swap kept investors unsettled about the future of the Euro Zone. However none of these factors ultimately derailed the upswing in equities. Following plenty of chatter last week, Moody's cut the ratings of Societe Generale and Credit Agricole and Fitch cut ratings on five Spanish regional governments, but these also did not decisively turn markets lower. News that China would continue to reinvest its FX reserves in Europe, in the bonds of challenged sovereigns as well as other assets, helped sustain markets, as did continued ECB purchases of Irish and Spanish debt. In addition, action by leading central banks to supply European financial names with a three-month dollar repo facility helped bolster sentiment. In the US there were several discouraging data reports. The September Empire State Manufacturing Survey indicated that conditions worsened for a fourth consecutive month. Realtytrac's August foreclosure index jumped more than 7% sequentially, and default notices rose 40% or more in troubled states like New Jersey, Indiana and California, reinforcing reports that banks are stepping up foreclosure efforts. The weekly initial jobless claims ticked up more than expected. The preliminary September University of Michigan consumer confidence survey inched up from the very weak final August data. Treasury yields remain very low ahead of an FOMC meeting next week that could see the introduction of "Operation Twist," although the 10-year UST edged back above 2% by week's end as funds flowed back into equities. Gold sold off modestly this week, with spot gold closing out the week around $1,800/oz. For the week the DJIA gained 4.7%, the S&P500 grew 5.4% and the Nasdaq increased 6.3%.

- Research In Motion's Q2 earnings report may be a real turning point, although whether it will be a final wake-up call for management or the beginning of the end only time will tell. Earnings and sales for the quarter missed expectations and guidance for the full-year was revised down to the lower end of the firm's prior outlook. Margins are collapsing, though management blamed the phenomenon on its poorly received Playbook product. But most notable were numbers showing that the company was losing market share much faster than expected to rivals Apple and Google. Multiple analysts slashed ratings and estimates for the name overnight, and shares of RIMM were down more than 23% in the first few minutes of cash trade this morning. In other tech disaster news, on Thursday Netflix trimmed its total domestic US subscriber outlook for Q3 to 24M v 25M prior due to attrition from its recent price increase and separation of DVD and streaming services, sending its shares tumbling through the end of the week.

- With the third quarter nearly over corporations continue to update their fiscal guidance. At its annual investor day, MasterCard was upbeat about spending levels even as the economic recovery stalls, and stated that both US domestic and global transaction volumes continue to expand in its Q3. Steel names Nucor and Steel Dynamics offered very weak guidance for Q3. Nucor said profits would be down 40-50% sequentially, reflecting lower steel prices and metal margins, particularly for sheet mill products. Steel Dynamics cut its Q3 outlook nearly in half, due to tightening profit margins in its flat rolled segment and a tough pricing environment. Patriot Coal warned that its Q3 coal output would fall by around 6% on a sequential basis due to geological issues. Following guidance cuts from leading semi names last week, Lattice Semiconductor revised cut the upper end of its Q3 revenue outlook citing softening demand trends. Materials name Solutia cut its full-year view due to flagging demand truck and bus, solar and electronic end markets. On the positive side, Aetna said that it would beat its prior guidance range for FY11, based on lower utilization and better margins, and offered a positive initial look at its FY12 assumptions. Smith & Wesson hiked its FY12 revenue outlook slightly thanks to booming business for guns.

- In M&A news, unconfirmed reports on Friday suggested that United Technology was preparing for a potentially huge acquisition, with stories indicating the firm is ready to spend $20B to nab a competitor. Analysts discussed various potential targets, including Tyco International, Honeywell, Goodrich and Textron. Follow-up press reports said that the company was looking to spend much less than the initial $20B figure. Yahoo's board met with private equity investors to discuss strategic options this week. In a filing, holder Third Point stated that it intends to remove Chairman Bostock with the help of founder and former CEO Jerry Yang. McGraw Hill disclosed that it plans to separate into two separate traded companies, following recent demands by activist investors to unlock value in the firm. Broadcom said that it had a deal to acquire NetLogic for $50/share, in a deal valued at $3.7B. The buy should expand Broadcom's lineup of chips used in wireless network equipment. Ralcorp slumped late Friday ahead of a Monday deadline set by ConAgra for entering negotiations over its $5.2B bid that Ralcorp has already rejected.

- The euro pushed out to six-month lows as of Monday as the fiscal stability of Greece further deteriorated. Comments from a range of European officials indicated that some leading European figures were coming to the realization that a Greek default could be a reality. With this scenario in sight, the EU Commission's Manuel Barroso said that the all-powerful Commission would present options for setting up a euro bond system under existing European treaties. Unsurprisingly, the Germans were not thrilled with this, and Chancellor Merkel reiterated once again that euro bonds are absolutely not a solution. Global central banks teamed up to squelch the emerging liquidity crisis at European banks, while speculation picked up that BRIC nations would ramp up investments in the euro zone, although it remains unclear to what extent they would be able to rescue Europe from itself. There were reports that the Italians were negotiating with China to buy bonds, but the weak Italian five-year bond auction on Tuesday suggested that nothing has been agreed to as of yet. Later reports stated that China was looking to make investments in Italian infrastructure instead.

- The three-month dollar repo facility launched by the Fed, ECB, BoJ, SNB and BoE on Thursday has potentially taken the risk of a funding crunch at European banks off the table. EUR/USD surged to test above 1.3935 after the announcement, although dealers were concerned that the pair was unable to regain the 1.40 handle; the pair was back around 1.3800 within 24 hours. Analysts were somewhat concerned about details regarding the mechanics of the repo facility, namely the very high 20% collateral surcharge for the three-month operations; compare this to the 12% surcharge charged for one-week repo operations. In addition, tapping these lines would temporarily increase the Fed balance sheet, creating intangible "political risk" in the United States (recall the accusations of "treason" GOP presidential hopeful Rick Perry aimed at Fed Chairman Bernanke).

- European officials gathered in Wroclaw, Poland on Friday to attend a Euro Group summit, which included a special appearance by US Treasury Secretary Geithner. Little in the way of concrete measures emerged from the meeting. Austria Finance Minister Fechter suggested that the next tranche of aid for Greece would be paid, although disbursement would be slightly later than expected, on October 14th. Greece was said to be planning to tap its domestic bank liquidity facility in order to bridge the funding gap. There was talk that Europe may be mulling a TALF-like program to help resolve the crisis, although little mention of such a program emerged from the summit. Geithner was said to have pressed the Euro Group to leverage up the EFSF, although ECB Chief Trichet later denied that any talks about bolstering the EFSF had taken place.

- Sterling benefitted from weekend press reports that UK Chancellor Osborne saw no barriers to a second round of quantitative easing if a request came from the BoE. GBP/USD also benefited from the coordinated central bank repo operation, but faced headwinds from former hawk Weale, as he noted that the risk of recession had increased since July and added that growth prospects had worsened again in recent weeks. EUR/CHF was little changed above 1.20 as the SNB reiterated its commitment to the floor. There were also suggestions that the floor could be pushed higher over time. Late in the week USD/JPY was inching higher on vague rumors the BoJ was checking FX rates in the interbank market.

- The Reserve Bank of New Zealand left rates on hold at 2.50% for the fourth consecutive meeting as expected. Accompanying RBNZ commentary struck a more cautious tone over global turmoil while downplaying improving domestic situation, spoiling expectations of reversal from a 50bps post-earthquake policy accommodation back in March. RBNZ Gov Bollard was also non-committal with regards to any policy tightening and only indicated that at some point rates will have to rise. He also expressed little concern about inflation. Private sector economists pushed back expectations for RBNZ tightening to March of 2012 from December of this year after the RBNZ statement, while NZD tested 1-month low of $0.8120.

- Beijing was once again billed as the "lender of last resort," helping risk sentiment recover early in the week on rumors of a Chinese delegation meeting Italian officials about backstopping Rome's fiscal slump with a timely purchase of government debt. Speaking later in the week, PBoC adviser Li Daokui affirmed Chinese interest in Italian bonds over the short term, but also called on the central bank to refrain from "blindly" buying large amounts of EU debt. Meanwhile, China foreign direct investment continued to slide in August, falling to 17.7% ytd/y increase, an 8-month low