Trade The News Weekly market update: Market Week
Wrap-up
- Volumes in US equity markets
remained low this week as major indices reacted to a mixed batch of corporate
earnings and a ceaseless stream of headlines about how the Europeans plan to
structure their big financial backstop. France and Germany have struggled behind
the scenes over the most appropriate way of levering up the pot of authorized
funding for the EFSF, how to restructure Greece's debt, how to recapitalize the
banks, and how to firewall Europe, and especially Italy, against the crisis. Few
concrete final details have emerged, although it appears that despite the
terrible state of Greece's austerity plans, there is no question that Athens
will get its next tranche of aid in November. The big US banks reported dismal
earnings for the third quarter, and Goldman Sachs actually took a loss. There
were other high-profile misses, including Apple, but overall the tone out of
corporate America has been relatively positive. On the data front, China's Q3
GDP data declined on a sequential basis for the third consecutive quarter,
registering its lowest reading in two years, although the very gradual declines
suggest that the Chinese government is so far managing an economic soft landing.
In Europe, the German October ZEW index of economic sentiment fell for the
eighth consecutive month. However some improved data in the US provided reasons
to doubt the inevitability of a return to recession. The October Philly Fed
survey registered its first positive reading since May, with a return to
positive new orders as well. Data on the US housing market were also
surprisingly positive. The October NAHB Housing Market Index hit its highest
level since May 2010, thanks to modest improvements in buyer interest in select
markets. More importantly, September housing starts increased at their highest
annualized rate in eighteen months thanks to a 51.3% y/y increase in
construction of multi-family units. For the week the DJIA gained 1.3%, while the
S&P500 and Nasdaq each rose 1.1%. Chartists noted that on Friday that the
S&P 500 had its best close in over two months, just 20 points shy of break
even for the year.
- On Tuesday Goldman Sachs reported its second
quarterly loss since going public back in the 1990s, citing troubles in its
investment portfolio and declines in trading revenue. Investment banking
revenues were down sharply on both a q/q and y/y basis, and there was a big net
negative revenue figure in its investing and lending segment. Like JPMorgan last
week, debit valuation adjustments (DVA) were a major factor in earnings out of
Citigroup, Morgan Stanley, and Bank of America this week. Morgan Stanley
reported headline earnings of $1.15/share, but after backing out the DVA gain,
it only earned $0.02/share. With its shares down 50% YTD due to fears about the
bank's exposure to peripheral European debt, Morgan Stanley reiterated that its
net funded exposure was approximately $2B, or $5.7B before hedges. Bank of
America's headline profit amounted to $0.56/share, but big asset sales and a DVA
helped it cover up some fairly substantial losses, including a $2.2B pretax loss
on private-equity assets and around $1.9B in charges related to mortgage
litigation, disposing of the international cards business and other items. Net
interest income fell to $10.7B from $12.7B a year earlier. Citigroup's earnings
were only slightly higher than expected, after subtracting a $0.39 gain from the
bank's debt value adjustment. Top-line revenue was in line, although the
investment banking business saw revenue decline 12% y/y, hurt by declining
underwriting and merger advisory fees.
- In other earnings, DJIA
components AT&T, Coca Cola, GE, IBM, Johnson & Johnson, McDonalds, and
Verizon all reported quarterly results that met or slightly exceeded
expectations. GE saw solid double-digit profit growth, although investors were
concerned that margins fell on a y/y basis, driven by a calm patch in the wind
business. Coca Cola saw decent growth in volumes, although it warned that cost
of goods sold was up 67% in the quarter, thanks to higher commodity costs.
Shares of American Express fell despite the firm's good profit growth and
excellent credit metrics, as expenses grew faster than revenue. J&J's
decline in domestic sales was more than made up for by double-digit y/y growth
overseas. AT&T did not impress investors with its soft postpaid subscriber
additions and iPhone activations. Apple's shocking miss weighed down the
tech-heavy NASDAQ index on Wednesday, with the miss attributed to potential new
customers holding off on buying an iPhone in anticipation of the new model
launch in October. Note that Apple's own forecast for Q1 lacked its typical
conservatism, as executives reiterated their high hopes for the iPhone 4S.
Microsoft reported decent results, although analysts were concerned that its
Windows 7 franchise made very minor gains after three quarters of declining
sales, in line with limp PC sales.
- Trading in US bond markets was
fairly subdued this week as much of the focus remained on Europe. Early on hopes
remained high and government borrowing costs in Europe continued to come down.
Signs that European corporate bond markets were beginning to thaw further aided
sentiment. But European sovereign spreads widened out as the week wore on and it
became clear there would not be an overriding solution agreed upon by this
weekend. The Italian 10-year touched 6% again and even French 10-year debt saw
its yield blow out relative to the Bund. On Friday traders pushed money back
towards riskier assets which sent Bund and Treasury yields higher. The US
10-year yield finished the week at 2.2% while the Bund closed at 2.10%.
-
Finding themselves still far apart on a master plan for solving the euro zone
crisis, European officials began the week with attempts to temper expectations
for the summit scheduled for October 23rd, warning that hopes they would deliver
a final solution to the crisis were overblown. By midweek the intensive talks
between Germany and France over the best use the expanded EFSF were still at an
impasse. To give themselves more breathing room, officials scheduled a second
summit meeting for Wednesday, October 26th and said the Sunday summit would be
used for further talks. Conflict over the best route to leverage the backstop
breaks down as follows: France would like the EFSF to be given a banking license
while Germany would like it to become an insurer that would back government
bonds. There are problems with each approach, especially given that the ECB
strenuously apposes giving the fund a banking license. In addition to the EFSF,
conflict rages over how great a haircut private holders of Greek debt should
ultimately take, with some saying participation in taking haircuts should be
made mandatory (current proposals call for them to be voluntary). But
ultimately, it's worth keeping in mind that the battle over the EFSF comes down
to one fundamental question: is there enough money in Europe to prevent a run on
the €1.9T Italian bond market?
- The threat of contagion was renewed by a
Moody's report warning it might put France's ratings on negative watch in the
next three months if the cost of bailing out banks or other euro zone members
adversely impacts its budget. The spread between 10-year French and German
government debt hit an all-time euro-era high of 120 bps this week, reflecting
nervousness about France's ratings. This in turn pushed out spreads on EFSF
debt, further exacerbating the situation and driving France to negotiate harder
for an EFSF structure that is suited to protecting its ratings. EUR/USD has
peaked above the 1.3900 level coming into the week, however the pair bounced
around between this level and 1.3650 on conflicting headlines about the state of
the European negotiations. By the end of the week the greenback was under
pressure again on an uptick in overall risk appetite.
- USD/JPY remained
basically locked within its 200 pip range for the 55th consecutive session but
dealers noted the current environment was ripe for a stop hunt as they eye some
massive dollar sell stops building below the 76 and 75 levels. The pair hit
fresh life-time lows below the 75.95 level after markets were disappointed by
Japan's formal plan to spend ¥2T on steps to ease the impact of the strong yen.
With USD/JPY at its lower end of the recent range, the price action could bring
the BoJ back into focus, and nerves will be on edge as intervention becomes more
of a possibility.
- China released the balance of its monthly economic
data that was largely in the same vein as its somewhat disappointing GDP
figures. Q3 growth slowed to a 2-year low 9.1%, below 9.3% forecasted, while
industrial production rose 13.8% y/y to break a string of two consecutive
monthly declines. Debate over a "hard" versus "soft" landing scenarios in China
attracted renewed focus in the commodity markets this week, as copper fell
sharply mid-week before a modest recovery on Friday. A number of press outlets
also saw a heightened concern over a brewing Chinese credit bubble, and a couple
of analysts also noted an inflation discrepancy as measured by monthly CPI and
quarterly deflator GDP figures indicating a lower probability of PBoC
easing.
- In Australia, the RBA released its policy meeting minutes
reiterating that inflation pressures appear to be more subdued over the medium
term, deferring to the next set of quarterly inflation metrics for setting
policy bias. Australia PPI and CPI will be announced on Sunday and Tuesday
evening respectively, with estimates suggesting an easing in early November
would be justified. New Zealand, on tap for a central bank rate decision on
Wednesday, is widely expected to leave rates unchanged for the fifth time, even
though RBNZ governor Bollard reiterated this week that it is not appropriate to
keep easy monetary policy at a time of earthquake rebuild.
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