Trade The News Weekly market update: Market Week
Wrap-up
- The rose colored glasses
stayed on this week as Europe's efforts to contain the crisis and a handful of
not terrible economic reports kept equity markets afloat. Volume remained
notably light all week despite the kick-off of the fall earnings season,
featuring an excellent quarter for Google and disappointing results from
JPMorgan and Alcoa. In Europe, officials dribbled out more details of how they
intend to contain the spiraling debt crisis. On Wednesday, the EU Commission
rolled out initial bank recapitalization proposals, settling on saying capital
ratios should be raised temporarily, and not settling on a specific figure
though chatter suggested they will demand 9% capital ratios at banks. Meanwhile
France and Germany continued to refine a range of proposals for utilizing the
newly approved EFSF expansion and discuss how much of a haircut on Greek debt
holdings their banks could withstand. All will be revealed at a special EU
summit next weekend, and investors will be looking forward to the Troika report
on Greece's reform efforts due in the middle of next week. On the data front,
overall euro zone industrial production expanded at a decent rate in August,
contrary to expectations. Trade data out of both the US and China was somewhat
concerning: China Sept trade balance hit a four-month low, including a
seven-month low in overall exports, while the US August trade report indicated
the trade deficit declined in August, versus expectations in a slight increase.
US Sept retail sales were not bad. In Asia, September CPI data was slightly
softer than expected in both South Korea and China. US Treasury yields moved up
this week as traders appeared more willing to add to risk positions. Treasury
supply was also a factor, in particular a disappointing 10-year note reopening
weighed on prices midweek. The US 10-year yield touched 2.25% for the first time
since August. Equity indices saw their first two-week stretch of gains since the
summer and closed at one month highs; for the week the DJIA gained 4.9%, the
S&P500 surged 6%, and the Nasdaq rocketed 7.6%.
- Poor earnings out
of JPMorgan limited the upside among the major US investment banks this week.
The firm's headline earnings came in at $1.02, beating estimates, although the
bank admitted itself that this figure was sweetened by a $1.9B debt valuation
adjustment. Excluding this gain, JP Morgan's earnings dropped around 25% on a
y/y basis. Revenue at JPMorgan's investment banking unit was down substantially
on a y/y basis. On the conference call, executives said Q4 performance at the
investment banking arm would be similar to Q3 results. The bank's private equity
unit also racked up a $500M loss. Banks may also have been weighed on by the
Federal Reserve and the FDIC releasing draft proposals for implementing the ban
on proprietary trading by banks (the so-called Volcker rule) for public
comment.
- Google comfortably beat expectations in its Q3 report on
Thursday, based on strong growth in paid clicks and nearly 40% y/y growth in ad
revenue. Executives also highlighted robust demand from emerging markets and
strength in mobile and display advertising. Google also disclosed that it is
planning to launch an MP3 music retailing store.
- PepsiCo met
expectations in its Q3 report and reaffirmed its FY11 outlook. Executives warned
that it was too early to offer an FY12 forecast, and also threw cold water on
calls to separate the firm's snack and beverage businesses. The CEO emphasized
that PepsiCo's success was tied to drinks and snacks units remaining
integrated.
- Alcoa widely missed profit expectations in its Q3 results,
citing the global economic slowdown for impacting demand and significantly
eroding margins. Profit still showed y/y growth, but was lower than the firm's
Q2 earnings. Executives still see Asia demand compensating for developed market
weakness in 2011.
- Shares of Netflix see-sawed on news that the company
has dialed back plans to split the DVD and streaming video businesses, following
howls of protest from both users and tech analysts. Hulu's owners discontinued
plans to sell the video platform following months of negotiations with potential
bidders. Apple officially launched the iPhone 4S on Friday; earlier in the week
announcing it had racked up one million pre-orders for the new model in the
first 24 hours, leading some analysts to predict Apple could sell as many as 25M
iPhones in Q4 (v 20M q/q).
- In deal news, Superior Energy Services
agreed to buy smaller rival Complete Production in a cash-and-stock deal for
about $2.6 billion, as the oil-field services company looks to expand its
hydraulic fracking business. Discount chain 99 Cents Only agreed to be acquired
by private equity firm Ares Capital for $22/share in cash, for a total deal
worth $1.6B. And Dollar Thrifty said that it had completed its review of
strategic alternatives without identifying any acceptable offers and plans to
remain an independent company.
- The euro gained traction early on this
week as participants were looking forward to positive developments in the euro
zone crisis. France and Germany pledged last weekend to present a new plan for
coping with the crisis that would include bank recapitalizations, a move which
would likely underpin a Greek debt restructuring and larger private investor
participation. The rhetoric boosted euro and other riskier currencies while
softening the greenback. However on Tuesday, the Slovakian parliament's initial
inability to pass legislation authorizing the enhanced EFSF dampened risk
appetite, sending EUR/USD below the 1.36 level. After settling its internal
political issues, Slovakia ratified the EFSF mid-week in a second vote, avoiding
the necessity for an embarrassing work around by the other 16 EMU members who
had already approved the EFSF expansion. European officials released their most
detailed proposals yet for containing the crisis through the back half of the
week, propelling EUR/USD above 1.3850 by the close of trade on Friday.
-
The euro seems to be stuck between two different policy approaches: on the one
hand there is the ECB, which is adamant against greater investor participation -
the bank and outgoing chief Trichet made alarming comments to the effect that
the crisis had reached systemic dimensions and forcing banks to pay more for
Greece would hurt an already vulnerable financial sector. On the other hand,
politicians, chiefly German officials, are advocating more private sector
involvement that would mean higher haircuts. Negotiations on the details of how
the EFSF and associated measures would be instituted continued all week in
conference rooms and through media leaks. On Friday, as the G20 finance
ministers met in Paris, there were reports the private haircuts on Greek debt
could be anywhere from 30% to as much as 50%, though bankers were said to still
be fighting for the original 21% haircut established in the July 21st accord. EU
Commission Chief Barroso laid out a five-year recapitalization plan for European
banks which left vague the provisions for 'perfect pure capital' and capital
ratios. The euro's resilience was remarkable given that the banking sector
continues to be very fragile, especially after Fitch downgraded UK banks and UBS
while putting many others' ratings on credit watch negative, and S&P revised
France's Banking Industry Country Risk Assessment (BICRA) rating to Group 2 from
Group 1. Even S&P's downgrade of Spain on Thursday afternoon did not keep
the overall risk-on atmosphere from helping the euro sustain its gains on Friday
as Europe began loading the bazooka at the G20 meeting. Now traders are looking
forward to the October 23 special EU summit, when the EU will officially reckon
with the Troika report on Greece, which could be a reality check for the current
euphoria with bearish implications for EUR/USD.
- Cable has traded
steadily throughout the week since the restart of the QE2 in Britain. However,
the cross seems to be helped more by the euro rally than UK fundamentals which
continue to be weak. Fitch downgraded the UK banks but that did little to change
the sterling's trajectory as Fitch cited the same reason as Moody's - the
downgrade was not because of banks' fundamentals but because the government
unwillingness to support the banks if it is needed. A welcome improvement was
the narrowing of the country's trade balance which may help Q3 GDP. In other
news, the EUR/CHF continued to hover in the upper 1.23 neighborhood on
continuing speculation that the SNB could increase its floor in the cross from
the 1.2000 level.
- After pivoting around 76.60 for most of last week,
USD/JPY climbed above 77 to test 77.40 on Wednesday on widespread chatter that
the BoJ would introduce a ceiling for the yen. The cross trailed back below 77
as no announcement was forthcoming, but a statement in the Japanese press by a
government official on Friday morning sent USD/JPY right back to the 77.40
level. The official stated that the government would likely introduce measures
to combat the strong yen as soon as next week in time to be included for the
third extra budget.
- China returned to the spotlight after a week-long
holiday with key developments in FX reform, trade, and inflation. After the US
Senate voted to ramp up its pressure to punish China for keeping the yuan too
low for too long, Beijing retaliated by weakening its currency setting for three
consecutive sessions, sending USD/CNY midpoint above CNY6.37 from CNY6.34 record
low. Amid these tensions, the US Treasury Department confirmed it would once
again delay its semi-annual currency report as various congressmen continue to
call for the report to name China a currency manipulator. On Thursday, September
trade figures for China saw some moderate slowing in both imports and exports,
as the overall surplus fell to a 4-month low $14.5B. Late in the week, China
September inflation data was also somewhat soft, allowing PBoC additional scope
for easing. CPI was in line with estimates at 6.1% but marked its 2nd
consecutive decline, while PPI saw a 9-month low 6.5%. The remaining monthly
metrics for September, along with Q3 GDP, are expected to be posted early next
week.
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