Friday, October 28, 2011

Market Week Wrap-up

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

- The euro zone leaders' summit on Wednesday dictated global market sentiment this week. Ahead of the meeting European officials worked very hard to dispel any ideas that a potential agreement would be the decisive end to the European debt crisis. France and Germany negotiated down to the wire, only coming to final agreement with Europe's major banks in the small hours of Thursday morning. In the end, Chancellor Merkel and President Sarkozy convinced the banks to take 50% haircuts on their Greek bonds and accept plans to boost their tier one capital ratio to 9% by next June. However everyone realizes that the deal raises as many questions as it answers; it also means that markets will face another wave of negotiations to settle a raft of outstanding issues in the months ahead. Fitch said the debt haircut plan would amount to a Greek default if it were carried out, even after the International Swaps and Derivatives Association (ISDA) said they believed the "voluntary" nature of the exchange would not trigger CDS. The equity rally that followed the deal was dampened on Friday after Italy was forced to accept a yield over 6% in an auction of 10-year debt, driving home the tenuous state of the Italian economy. Corporate earnings among industrial and energy names were relatively strong, while the initial +2.5% reading US Q3 GDP data helped dampen fears of an imminent return to recession in the United States. The HSBC flash PMI report for China also calmed some nerves about a Chinese hard landing. In the negative column, the US October Consumer Confidence index was much weaker than expected, putting the index back at levels seen during the 2008-09 recession. Commodity prices surged along with equities: WTI crude remained firmly above the $90 handle, while spot gold gained approx $100 to trade just shy of $1,750. Copper prices moved up to the highest level in more than a month testing $3.75. For the week the DJIA gained 3.6%, the Nasdaq rose 3.8% and the S&P500 increased 3.7%, putting it positive territory for the year.

- The world's largest oil companies reported robust profits, capitalizing on higher prices and improved refining margins in the third quarter. Shell doubled its profits y/y, Chevron nearly doubled its earnings, Exxon's profit was up 41% y/y. Gains at ConocoPhillips, Total and BP were not quite as huge, but still impressive. Nevertheless, there was very little evidence that any of the supermajors are managing to grow production levels, limiting share gains this week.

- Despite the economic deceleration seen over the summer, manufacturing names performed extremely well during the third quarter. Caterpillar ground consensus estimates into dust, on profits that were up 44% y/y. Ford beat Q3 expectations, although profits slipped a bit on a y/y basis thanks to higher commodity costs. Boeing, General Dynamics, Northrop Gumman and Lockheed Martin beat, although executives cautioned that cuts to the FY12 US defense budget could be a big headwind next year. There were signs of trouble, however. Goodyear's results were strong, but it warned that tire sales volumes in North America declined 8% y/y. Whirlpool's results were not strong at all, and the firm announced that it would cut 10% of its workforce. Continuing trouble among tech-sector clients hurt 3M, which also cut its full-year outlook.

- Tech icons Netflix and Amazon saw big slides in their share values this week. Shares of Netflix were down as much as 36% after the company admitted that 800K customers had fled the service in the quarter following its failed attempt to split its streaming and DVD business. Shares of Amazon fell by double digits after margins collapsed and it missed top- and bottom-line, due in large part to the launch of the Fire tablet. Sprint's quarterly loss was a bit smaller than expected, and the firm outlined its strategy for betting the farm on the iPhone 4S. Radioshack got slammed after the firm's profits tanked on a big decline in margins and awful sales comps. In other news, Hewlett-Packard announced that it had decided not to spin off its PC unit.

- Visa's profit and revenue growth rates slowed on a sequential basis although payment volumes and total transactions showed healthy growth. Leading health insurance names reported quarterly results that were widely boosted by lower utilization rates, thanks to the weak economy and high unemployment. Metlife modestly exceeded expectations in its Q3 report, thanks in part to double-digit growth in international premiums and a big gain in investment income.

- Consumer staples names Colgate and Procter & Gamble met expectations in quarterly reports, although guidance was lackluster. Colgate said FY11 margins would fall further than expected due to "significantly higher" costs, while Procter's Q2 guidance was very soft. At UPS, volumes and revenues showed little growth, and the only bright spot in the firm's outlook was Asia.

- Trading in fixed income markets remained highly dependent on traders' overall affinity towards risk this week. The positive momentum that built up heading into the eurozone's master-plan announcement sent Treasury yields to their highest levels since early August. Corporate bond markets awakened with notable deals by some of the largest European financial companies, and even demand for high yield debt picked up. By Friday though, the Euro euphoria gave way, highlighted by another surge wider in sovereign debt spreads. The Italian 10-year yield reached 6% while Spain's 10-year rate climbed 18 basis points to 5.47%. Bund and Treasury prices bounced getting back a modest portion of the post summit losses. For the week the US 10-year yield backed up about 10 basis to points to finish above 3.3%.

- The euro traded in a tight range against other major currencies ahead of the successful leaders' summit on Thursday morning, with EUR/USD pivoting around 1.3900. Stabs downward followed on rumors that the summit would be cancelled or put off - the pair tested the 1.3850 level on confusion over the timing of various meetings on Wednesday - and continued ECB purchases of peripheral European sovereign debt helped hold up the single currency. Note that data out on Monday indicated that the ECB had boosted the amount it settled in the bond buying program last week to €4.5B from the prior week's €2.2B. Early on dealers were saying that the market was still maintaining net euro short positions, although they were mostly flushed out as the week progressed on optimism about possibilities for a successful summit outcome, and in the end the shorts were crushed. After the deal was announced, EUR/USD tested its former one-year uptrend line that was broken back in early September at the 1.4200 level. Note that 1.3970 is critical hourly support to maintain the recent upward momentum. USD/CHF tested five-week lows below the 0.88 level. The Swiss Franc did not react to comments from SNB Chief Hildebrand, who reiterated that the SNB will defend its floor with full determination.

- USD/JPY hit consecutive all-time lows several times this the week. Verbal intervention by numerous officials warned about the yen and even increases to Japan's asset purchases failed to weaken the JPY. Tough talk between the US and China on trade issues is punishing the yen: the US Treasury this week warned that China's access to US markets depended on fixing discriminatory trade practices. BoJ intervention risk has increased as this sort of rhetoric has heated up of late. Japan Finance Minister Azumi stated that Japan sees USD/JPY between ¥76-77 as inappropriate.

- In China, the 51.1 print in the October HSBC flash manufacturing PMI marked the first expansionary result in four months, setting a bullish tone for the week on Monday. The full official manufacturing data is expected early next week and it should indicate further improvement, as the official data includes some of the larger and more stable state-owned entities.

- Rate decisions from central banks of New Zealand and Japan were on the opposite sides of the policy spectrum. The RBNZ surprised analysts looking for a more dovish assessment in light of constraints from the EU sovereign debt crisis, reiterating that future rate increases may be needed if global impact turns out to be mild. NZD hit five-week lows above $0.82 against USD and also gained against AUD. In contrast, the Bank of Japan expanded its asset buying program by ¥5T to ¥55T, pledging to purchase additional long-term JGSs through the end of 2012. Australia is on tap for a policy decision early next week, as analysts pushed forward expectations for a rate cut following softer than expected Q3 consumer inflation data.

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