Friday, November 4, 2011

Market Week Wrap-up

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

- Last week France and Germany struggled to hash out plans to prop up Greece, protect European banks from disaster and prevent contagion from overtaking Italy. This week Greek PM Papandreou threw all these accomplishments into question with a series of intricate and opaque political maneuvers, making a huge gamble in an attempt to secure domestic political support for the bailout. The back-and-forth in Athens whipped around global markets, with background accompaniment from the sound of MF Global collapsing, Italian PM Berlusconi making it up as he went along and peripheral debt yields soaring higher. On Monday afternoon, Papandreou shocked his European partners, the broader markets and even his own finance minister by announcing that his government would submit to a confidence vote and launch a public referendum on the bailout and perhaps even on Greece's continued membership in the euro zone. The move pulled the rug out from under European officials seeking investors for the newly strengthened EFSF (the Chinese, not inclined to invest in the first place were given even fewer reasons to buy EFSF bonds). In addition, it highlighted European discord just as "Merkozy" headed to the G20 summit to reassure the world that Europe could control the crisis. Yields on European debt shot higher, and spreads between peripheral debt and the German bund widened out to record levels. By late in the week it had become apparent that the referendum was merely a tactic to force Papandreou's political opponents to concede to the formation of some sort of unity government, provided the current Socialist (PASOK) leadership can survive a vote of confidence scheduled for later tonight. A vote of no confidence or the failure to form a unity government could lead to a disorderly default by Greece.

- On Thursday, the ECB unexpectedly cut its key rate by 25bps, reversing one of the two rate hikes it enacted in April and July. Commentators saw the cut as the potential beginning of the ECB drifting away from its single mandate of price stability and towards a greater focus on economic growth. This speculation was encouraged by comments from freshly-minted ECB President Mario Draghi, who in his first press conference commented on possibility of lowering the ECB's euro zone growth outlook with staff projections in December and warned that the euro zone could experience a mild recession. World leaders assembled in Cannes, France for the G20, where there were low expectations for collective action to stem the re-emergence of global recession. Risk-off sentiment only grew after German Chancellor Merkel stated in her post-G20 press conference that the members had failed to agree on a plan to boost the financial resources of the IMF, although they did agree on an "action plan" to increase economic growth. Kicking the can down the road, the G20 said they would meet again in February 2012 to work out the mechanisms for boosting IMF resources. In the US, the October employment report disappointed expectations, but higher revisions of September and August readings balanced out the fresh data. As expected, the Fed revised its economic forecast lower and gave additional indications that it would be prepared to enact further fiscal stimulus (read QE3) if the economic situation deteriorates significantly. For the week the DJIA dropped 2%, the Nasdaq fell 1.9% and the S&P500 declined 2.5%.

- It was another tough week for the financial sector, with the trouble in Greece merely providing a baseline of bad news for the entire sector. MF Global filed for bankruptcy on Monday morning, immediately after having its primary dealer status revoked by the NY Fed. CEO Jon Corzine had resigned his position by the end of the week. The Greek turmoil sent bank shares lower through Monday and before the open on Tuesday. On Thursday morning independent ratings firm Egan-Jones downgraded Jefferies' rating one notch to 'BBB-', warning that MF Global's problems have increased scrutiny of sovereign debt held by other medium-sized broker/dealers. Jefferies responded with a series of increasingly detailed disclosures on its positions in European sovereign debt, helping lift its shares off of their lows. Bank of America and several other major firms dropped plans for fees for debit card usage, citing the highly negative public reaction. In addition, BoA disclosed that it plans to issue approx $2.8B in new shares, despite months of assurances by CEO Moynihan that the bank had no need to raise additional capital.

- In financial services earnings news, MasterCard reported sharply higher Q3 profits, easily beating Wall Street estimates on double-digit increases in volumes. Allstate and health insurance giant Humana followed in the footsteps of major competitors and reported very strong profits. Hartford Financial's Q3 earnings and revenue were disastrous, thanks to charges from lower assumptions on future profits due to the decline in global stock values.

- In the energy patch, refiners Murphy Oil, Valero, and Marathon delivered very strong y/y profit growth thanks to low crude prices and excellent refining margins, easily beating out the Street's expectations. Profits at coal major Alpha Natural Resources were extremely strong. The firm's FY12 coal shipment guidance indicated more than 20% growth y/y, thanks to robust international demand.

- In the consumer segment, Kraft easily exceeded expectations and nudged its FY11 guidance slightly higher. Kellogg's earnings disappointed investors and the firm cut its FY11 guidance slightly. Prepaid wireless names Leap and MetroPCS had poor earnings results, although both noted that the third quarter is typically its worst quarter. Home improvement retailer Lowe's missed earnings targets by a wide margin, as revenue contracted from year-ago levels. Starbucks had a good quarter, with solid profit growth slightly ahead of expectations.

- There were a few poor industrial segment reports out this week. Engineering giant Fluor's quarterly profits disappointed investors and the firm failed to raise its full-year view. Foster Wheeler reported lower-than-expected Q3 profits as both its engineering and construction arm and its power unit posted declines. Shaw Group's results also widely missed expectations. Oshkosh was firmly ahead of consensus expectations, although like many other defense-oriented names, it lowered its defense segment guidance due to uncertainties in government spending.

- FX markets were highly volatile as dealers coped with the BoJ intervention, the MF Global bankruptcy and the continuing Greek drama. Last Friday EUR/USD failed to close above the pivotal 1.42 handle, and by Monday morning the cross was poised to drop below 1.40. The shocking announcement of the Greek referendum plan immediately forced the cross much lower, putting it just above 1.36. However, with all the twists and turns in the highly opaque process surrounding the referendum and the confidence vote in Greece, 1.3640-50 has again proved to be a formidable support level. The FOMC decision on Wednesday drove some dollar softness, however EUR/USD could not muster enough momentum to even reach 1.3870, and the cross probed the lower end of its recent range after ECB unexpectedly cut its key rate by 25bps.

- The BoJ backed up its recent rhetoric with action this week, undertaking unilateral currency intervention in the USD/JPY pair on Sunday night. Prior to the intervention, the dollar was testing fresh WWII lows against the yen, and as a result of the BoJ action the pair soared over 350 pips to test the 79.50 level where the G7 first intervened back in March. This was the BOJ's third solo intervention since Sept 2010, in addition to the G7 coordinated move in March. Dealers said that real money flows took advantage of the initial yen weakness in an attempt to take on the BoJ. The pair tested the 78 level for the remainder of the week.

- As promised in last month's meeting, the Reserve Bank of Australia responded to softer quarterly CPI data with a rate cut on Tuesday -- the first change in RBA stance since last November and the first easing since April of 2009. In his accompanying commentary, Governor Stevens reiterated that inflation is now consistent with the bank's 2-3% target, as softer labor conditions, anticipated decline in terms of trade, and slower growth in China all justify a "more neutral stance." Later in the week, the RBA Quarterly Policy Statement also called for lower 2012 GDP of 3.0-3.5% v 3.75% prior, and a core inflation target of 2.75%. Fixed income markets have fully priced in another 25bps cut in early December, which would be consistent with RBA tendency toward consecutive easing actions.

- The October China Manufacturing PMI was a big disappointment, hitting a 33-month low of 50.4, below the 51.8 consensus view and breaking a string of two consecutive rising prints. Sentiment from government and industry officials was similarly gloomy, setting up more disappointment for next week's industrial production data. State researcher Ba Shusong warned that growth may slow because of lagging exports, China Iron and Steel Association noted a pronounced slump in steel production since mid-October, and loans extended by China's top four banks were seen well off pace at just CNY200B. Pressure on the PBoC to back away from its "prudent" stance may continue to grow as China growth engine continue to sputter -- indeed, a press report late in the week suggested regulators have started to ease lending standards for some of the mainland banks.