Market Week Wrap-up
- European and US equity indices snapped back sharply this week from weakness early on as European officials began hashing out concrete plans to backstop their banking system ahead of a potential Greece meltdown. Risk aversion drove trading coming into the week as leaked Greek budget figures indicated the country may miss 2011 and 2012 targets, forcing the EU to delay the payout of aid to Greece and postpone a key summit meeting. Adding to the dread, there was news that officials were discussing how to save French/Belgian bank Dexia, which was rapidly deteriorating after its big write down of Greek debt back in August. Both events seem to have overcome lingering skepticism in various European capitals - especially Berlin - that coping with Greece will require bank recapitalization. By mid week German Finance Minister Schaeuble was talking about reactivating the SoFFin stabilization fund, used to stabilize German banks in 2008, and the European Commission's Barroso indicated the EFSF could be used for backing the banks. France and Germany were disagreeing over the fine details, but were essentially on board with the plan (details are to be hashed out at the Oct 17th special EU summit, and Merkel and Sarkozy will have a conclave this weekend). The bank rescue talk reignited risk appetite and drove money out of USTs, Bunds and the dollar. Gold had dipped back below $1,600 and the dollar was at nine-month highs against the euro before sentiment reversed on Tuesday. On Thursday the BoE and ECB held rates steady, although the focus has been on various special measures launched by both institutions to hold down rates and boost liquidity. The US September non-farm payrolls report beat expectations with a +103K headline number and a +137K private payrolls figure, however the re-addition of 45K striking Verizon workers skewed these figures higher. The specter of recession was raised again in Europe by lower-than-expected final UK Q2 GDP data and the German September PMI falling below 50 for the first time since July 2009. A better than expected China manufacturing PMI reading, released over the weekend, eased some worries about an economic hard landing in the global growth engine. For the week the DJIA gained 1.7%, the S&P500 added 2.1% and the Nasdaq rose 2.7%.
- Pressure built on the big US banks this week after French-Belgian bank Dexia all but collapsed and European officials stepped up planning efforts to backstop their banks against disaster in Greece. Other factors were in play as well. Ratings agency Egan-Jones downgraded Morgan Stanley's rating to A from A+, citing uncertainty about Morgan's exposure to French banks and derivatives. There was talk that some of the firm's counterparties had lowered their exposures as credit default swap (CDS) prices on Morgan Stanley soared. A study commissioned by Congress estimates direct exposure of US banks to the European debt crisis at nearly $650B - although this week both Fed Chairman Bernanke and Treasury Sec Geithner said US bank exposure was minimal. There were unconfirmed reports that Goldman Sachs would cut bonuses to zero on expectations of a net loss in Q3, with the bank's revenue at half the amount seen in Q2. Shares of Bank of America led its competitors to the downside on Tuesday, prompting Warren Buffett to comment that he is not concerned about declines in the bank's shares.
- With markets unsettled and funding tight, M&A action has nearly dried up entirely. The only major deal news this week concerned Yahoo, shares of which gained 14% this week. On Monday, Alibaba Chairman Jack Ma said his company is very interested in acquiring Yahoo. Ma said he has had discussions with Yahoo, as well as other potential bidders. Later reports indicated that hedge fund Silver Lake was looking to join a bid for Yahoo. Rumors went around that Microsoft was rebooting its bid for the company, although Redmond moved quickly to squash this talk. In other deal news, Pharmaceutical Product Development agreed to be taken private by The Carlyle Group and Hellman & Friedman for $3.8B in cash.
- The relatively strong September same-store sales data showed that retailers benefitted from a decent back-to-school season despite the tepid economic outlook. Big-box and department stores generally topped expectations and saw better growth than in August. Target, Kohl's, Macy's, and Dillard's all roundly beat consensus estimates, while high-end names Nordstrom's and Saks both crushed expectations. JCPenny comps were negative for a second consecutive month and the company also cut its guidance for Q3 citing higher-than expected restructuring charges. Discount apparel name TJX returned to strong comps after a disappointing blip in August. The Limited repeated its double-digit comp gains as seen in August, while the Gap is still reporting comp losses, although slightly less of a loss than expected.
- EUR/USD began the week on a softer note, approaching nine-month lows below 1.3150 as technical damage to the euro and other European currencies handed momentum to the greenback. The technical picture for the euro was bearish when the "death cross" appeared on Monday's daily chart, which is when the 50-day moving average crosses below the 200-day moving average. Dealers said that the last time a death cross was seen was back in February 2010, when the euro descended from 1.3500 to 1.2000. The euro short trade got a bit crowded, however, and later on in the week some short-covering was seen ahead of the ECB rate decision. Bearish sentiment slowly drained away following comments from EU Commissioner Barroso that Europe would work to recapitalize the banking sector. EUR/USD was probing the 1.3500 neighborhood by Friday morning, aided by the sharper risk appetite that followed the US payroll data.
- Both the ECB and the Bank of England held rates steady in policy meetings this week and also announced fresh liquidity measures for markets. The ECB said it would continue to offer LTROs at fixed rates and renewed the 12-month operation. The ECB also reactivated its covered bond buying program. In his final post rate decision press conference as ECB chief, Trichet said that governors discussed the pros and cons of a possible rate cut, but the consensus was to stay on hold. Meanwhile the BoE increased its QE measures, raising the Asset Purchase Target by £75B to a total of £275B. GBP/USD fell 200 pips following the additional QE measures but found momentum to recover the losses by Friday. GBP/USD probed back towards 1.56 by Friday after testing 1.5266 earlier in the week.
- EUR/CHF saw several spurts above the 1.24 handle on hopes that the SNB might raise its floor for the cross from the 1.2000 level. The SNB made no such move and offered no comments on the subject throughout the week; the mood was also tempered after the Swiss September CPI came in above expectations. The recurring speculation about a revision in the EUR/CHF floor appeared to stem from continued Swiss government officials saying that the CHF currency remains overvalued at current levels.
- In Asia/Pacific news, interest rate decisions in Australia and Japan saw the former acknowledge a slowdown on the cooling China-driven commodity boom and the latter cheer more incremental progress in post-earthquake recovery. The RBA left interest rates unchanged but foreshadowed "heightened scope for policy to support demand" if the inflation outlook becomes more manageable. Australia's central bank expects the path for inflation to become more consistent with its 2-3% target over the next 2 years, a notably more dovish bias from the recent warnings about continued price pressure into the medium term. Late October quarterly inflation data should determine expectations for next month's meeting, with a sub-3% y/y print likely leading to a rate cut. In Tokyo, the BoJ upgraded its economic assessment, pointing to continued pick-up in production, exports, business investment, and private demand. Early in the week, the quarterly Tankan survey justified the more upbeat BoJ tone, as Q3 manufacturing and non-manufacturing components returned to growth following the sharp post-quake declines during Q2.
- China manufacturing PMI released over the weekend further alleviated worries over an economic nosedive, supporting the "soft landing" scenario advocated by policymakers in Beijing. The 51.2 print was within a decimal point of consensus and marked a four-month high and a second consecutive monthly increase. China has been on vacation for the week but returns to business with monthly inflation data on tap for Thursday. Further decline below the 6.2% CPI in August should bolster the case for a projected PBoC easing in reserve requirements.
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