Trade The News Weekly market update: Market Week Wrap-up
- The situation in Greece stabilized this week with the swearing in of a new government, headed by former ECB Vice Chairman Lucas Papademos, leaving markets free to maul Italy. Coming into the week, Italian Prime Minister Berlusconi clung tenuously to power until his coalition partners withdrew support for his rule, threatening an immediate collapse of the government. Political breakdown drove bond market chaos, and yields on Italian 10-year debt surged above the key 7% level early on in the week. But the ECB repeatedly stepped in to buy Italian bonds and helped shepherd yields back below 6.5% by the end of the week. The situation frightened Berlusconi into pledging that he would resign and permit the formation of a new government, a process that should be completed this weekend. Global equity markets sank in inverse proportion to Italian yields, although they rebounded significantly on Friday, in thin trading that accompanied the closure of US bond markets for the Veterans Day holiday. In the US, there was a great deal of uncertainty about the ability of Congress' bipartisan supercommittee to agree on a spending and deficit slashing plan. In Asia, China's October economic data, including PPI and CPI reports and industrial production, were weaker than expected. For the week the DJIA gained 1.4%, the Nasdaq slipped 0.3%, and the S&P500 dipped 0.8%. Safe haven flows favored gold during the week as the precious metal re-approached the $1,800/oz area, and crude oil climbed another 5% to $99/barrel.
- Most of the S&P500 has now reported earnings, and the Q3 earnings season is winding down. General Motors Q3 profit was down 15% y/y thanks to a loss in Europe. In addition, the firm warned that operating profit in the current quarter would be flat. GM also faced an NHTSA report that raised concerns about a fire hazard from the massive batteries that power the Chevy Volt electric vehicle. Note that after GM reported, Ford's CEO said he was concerned with the uncertainty facing the economy, but pledged to deliver on the company's earlier FY11 European forecasts.
- In tech, Cisco once again modestly exceeded expectations on modest profit growth. Investors were pleased to hear CEO Chambers say the firm has completed most of its restructuring and remains focused on margins. Chip maker NVIDIA's quarterly profit widely beat expectations. Executives were very positive about the competitive potential of the firm's new Tegra 3 processor in the mobile phone space. Computer gaming names Activision and Take-Two both topped expectations in quarterly reports; Activision hiked is FY11 outlook and Take-Two reaffirmed its FY12 outlook. Additionally, Activision said that its newly released Call of Duty: Modern Warfare 3 game set a record with $400M in sales in the first 24 hours of sales.
- Retailers Macy's, Liz Claiborne, and Ralph Lauren all comfortably topped earnings expectations, Macy's and Liz by wide margins. Liz and Ralph Lauren saw big double-digit increases in quarterly comp sales metrics. Macy's also tweaked its FY11 outlook higher. Nordstrom disappointed investors after it merely met expectations and failed to increase its FY11 outlook. McDonald's reported a higher-than-expected rise in worldwide October same-restaurant sales, with a strong +5.2% result in the United States.
- Homebuilder DR Horton missed both top- and bottom-line expectations slightly, although its sales orders, backlog and closing metrics showed strong growth. High-end builder Toll Brothers released a very positive preliminary look at the firm's Q4. Revenue beat expectations and the firm's home deliveries, signed contracts and backlog were all up notably over year-ago levels.
- European debt markets were once again the overriding factor in fixed income trading. Risk assets began the week out of favor as sovereign spreads, particularly in Italy and France, blew out to fresh all-time highs. Treasury and Bund markets rallied early on pushing the US benchmark back below 2% and the German 10-year briefly under 1.7%. As the week drew on though, the political situation in both Greece and Italy appeared to stabilize while reports also suggested the ECB had become more aggressive in purchasing sovereign debt which helped restore risk appetite. European sovereign spreads narrowed into Friday while Bund and Treasury futures prices sold off. High grade corporate debt underperformed under the weight of a mountain of late year issuance and the investors' increased willingness to take on riskier assets.
- The installation of a transitional government in Athens and the imminent departure of Berlusconi capped a rollercoaster ride in FX markets this week. After Greece committed itself to forming a new government last weekend, the focus shifted to Italy, where temporizing by Berlusconi and moves in the bond market hammered the euro on Wednesday and Thursday. On Sunday, ECB member Mersch warned that the ECB might discontinue purchases of Italian bonds if the government was unable to provide strong evidence that it would be able to meet its fiscal targets. More press reports indicated that the ECB governing council was not interested in giving Berlusconi's government cover via continued bond buying. These hints were not enough, however, and Berlusconi continued efforts to cling to power, until finally his Northern League coalition allies abandoned him in a procedural vote on Tuesday. With fears that the entire government could collapse in a no-confidence vote at any time, yields on the Italian 10-year surged above 7%, prompting clearinghouses to hike margin requirements for Italian bonds, which squeezed yields even higher. Outright yields and spreads against the 10-year German Bund widened for the debt of all euro-zone member states. With the Italian yield spread blowing out, FX dealers reminisced about how long it took other peripheral euro zone states to beg for bailouts after yields on their 10-year notes rose above 7%: Portugal took 49 days, Ireland lasted 15 days, and Greece only held out for only 13 days. The response in the bond market sharpened Berlusconi's resolve, and he agreed to step down following parliament's passage of the government's 2012 budget, including austerity measures, which should be complete by Sunday. Former EU commissioner Mario Monti is the most likely candidate to lead a transitional Italian government.
- On Wednesday morning, before real panic had set in, EUR/USD was trading above 1.3850, but by late the same day the cross was below 1.3550 and on Thursday morning the cross dipped briefly below 1.3500. As the week drew to a close the euro was off its worst levels, after the Italian upper house approved the budget and austerity measures, Portugal's Parliament approved its 2012 draft budget and Greece officially appointed Papademos as the new prime minister and swore in a new cabinet. Italy managed to sell 12-month bills and Spain said that it would proceed with its planned auction next week despite extreme market conditions. And despite Mersch's comments, the ECB continued aggressive buying of peripheral bonds all week. Nevertheless, multiple ECB figures spoke out against calls for the ECB to staunch the crisis by undertaking even more aggressive bond buying or by setting itself up as the "lender of last resort" for various euro zone institutions, including banks. Dealers note that the ECB might discuss unsterilized primary and secondary bond purchases, an action is currently forbidden under the central bank charter, but might be excused if it helps to ensure an orderly market. In multiple statements, outgoing member Stark reiterated that the ECB is committed to its single mandate and that becoming a lender of last resort would sacrifice ECB independence.
- The Swiss National Bank (SNB) continued its rhetoric on the over-valuation of the Swiss currency as Oct Swiss CPI report re-enforced its concerns over deflation. The franc maintained a soft tone, and SNB member Jordan reiterated several times this week alone that the currency remained overvalued even with the current floor of 1.20 against euro. There have been persistent rumors that the SNB could shift that floor to anywhere from 1.25 to 1.35. The EUR/CHF cross ended the week just under the 1.24 level.
- The USD/JPY pair managed to move below the 78 handle with markets testing the BOJ resolve to weaken the JPY currency. The BoJ had not been directly involved in the pair since the Oct 31st massive intervention, but was reportedly using semi-official names to keep it close to 78.00. The pair continued to drift lower towards the lower portion of the 77 neighborhood.
- October economic metrics out of China served up a progress report for Beijing policymakers threading the needle of a soft landing. The most closely monitored CPI figure fell for the 3rd consecutive month and also matched its 6-month low at 5.5%, in line with consensus. Industrial production and trade data were bleak. The former came in at an 11-month low of 13.2%, offsetting last month's upside surprise. The latter saw the first rise in the overall terms of trade in three months at a $17B surplus, but also showed the slowest growth in exports since February, undoubtedly related to slower growth in Europe -- China's top export destination. Expectations of a policy easing response by the PBoC continued to percolate after the data, as China slashed the yield on its weekly 1-year bill auction to 3.5733% for the first time in nearly 3 months. China bank lending data marked a silver lining to the monthly reporting barrage, with October loans at a 4-month high of CNY587B above CNY500B consensus.
- Elsewhere in the Far East, Thailand flooding continued to inflict damage on the companies most exposed to the manufacturing hub. Reporting first-half results, Toyota was forced to withdraw its full-year outlook because of uncertainly related to supply disruptions. Japanese automakers, barely recovered from the March earthquake, continue to battle the perfect storm of persistently strong currency, slowdowns in their key export markets, and now more natural disasters. In South Korea, the central bank left rates unchanged at 3.25% for the 5th consecutive month but also scaled back its tightening bias, pointing to a longer than anticipated global turmoil.
- The situation in Greece stabilized this week with the swearing in of a new government, headed by former ECB Vice Chairman Lucas Papademos, leaving markets free to maul Italy. Coming into the week, Italian Prime Minister Berlusconi clung tenuously to power until his coalition partners withdrew support for his rule, threatening an immediate collapse of the government. Political breakdown drove bond market chaos, and yields on Italian 10-year debt surged above the key 7% level early on in the week. But the ECB repeatedly stepped in to buy Italian bonds and helped shepherd yields back below 6.5% by the end of the week. The situation frightened Berlusconi into pledging that he would resign and permit the formation of a new government, a process that should be completed this weekend. Global equity markets sank in inverse proportion to Italian yields, although they rebounded significantly on Friday, in thin trading that accompanied the closure of US bond markets for the Veterans Day holiday. In the US, there was a great deal of uncertainty about the ability of Congress' bipartisan supercommittee to agree on a spending and deficit slashing plan. In Asia, China's October economic data, including PPI and CPI reports and industrial production, were weaker than expected. For the week the DJIA gained 1.4%, the Nasdaq slipped 0.3%, and the S&P500 dipped 0.8%. Safe haven flows favored gold during the week as the precious metal re-approached the $1,800/oz area, and crude oil climbed another 5% to $99/barrel.
- Most of the S&P500 has now reported earnings, and the Q3 earnings season is winding down. General Motors Q3 profit was down 15% y/y thanks to a loss in Europe. In addition, the firm warned that operating profit in the current quarter would be flat. GM also faced an NHTSA report that raised concerns about a fire hazard from the massive batteries that power the Chevy Volt electric vehicle. Note that after GM reported, Ford's CEO said he was concerned with the uncertainty facing the economy, but pledged to deliver on the company's earlier FY11 European forecasts.
- In tech, Cisco once again modestly exceeded expectations on modest profit growth. Investors were pleased to hear CEO Chambers say the firm has completed most of its restructuring and remains focused on margins. Chip maker NVIDIA's quarterly profit widely beat expectations. Executives were very positive about the competitive potential of the firm's new Tegra 3 processor in the mobile phone space. Computer gaming names Activision and Take-Two both topped expectations in quarterly reports; Activision hiked is FY11 outlook and Take-Two reaffirmed its FY12 outlook. Additionally, Activision said that its newly released Call of Duty: Modern Warfare 3 game set a record with $400M in sales in the first 24 hours of sales.
- Retailers Macy's, Liz Claiborne, and Ralph Lauren all comfortably topped earnings expectations, Macy's and Liz by wide margins. Liz and Ralph Lauren saw big double-digit increases in quarterly comp sales metrics. Macy's also tweaked its FY11 outlook higher. Nordstrom disappointed investors after it merely met expectations and failed to increase its FY11 outlook. McDonald's reported a higher-than-expected rise in worldwide October same-restaurant sales, with a strong +5.2% result in the United States.
- Homebuilder DR Horton missed both top- and bottom-line expectations slightly, although its sales orders, backlog and closing metrics showed strong growth. High-end builder Toll Brothers released a very positive preliminary look at the firm's Q4. Revenue beat expectations and the firm's home deliveries, signed contracts and backlog were all up notably over year-ago levels.
- European debt markets were once again the overriding factor in fixed income trading. Risk assets began the week out of favor as sovereign spreads, particularly in Italy and France, blew out to fresh all-time highs. Treasury and Bund markets rallied early on pushing the US benchmark back below 2% and the German 10-year briefly under 1.7%. As the week drew on though, the political situation in both Greece and Italy appeared to stabilize while reports also suggested the ECB had become more aggressive in purchasing sovereign debt which helped restore risk appetite. European sovereign spreads narrowed into Friday while Bund and Treasury futures prices sold off. High grade corporate debt underperformed under the weight of a mountain of late year issuance and the investors' increased willingness to take on riskier assets.
- The installation of a transitional government in Athens and the imminent departure of Berlusconi capped a rollercoaster ride in FX markets this week. After Greece committed itself to forming a new government last weekend, the focus shifted to Italy, where temporizing by Berlusconi and moves in the bond market hammered the euro on Wednesday and Thursday. On Sunday, ECB member Mersch warned that the ECB might discontinue purchases of Italian bonds if the government was unable to provide strong evidence that it would be able to meet its fiscal targets. More press reports indicated that the ECB governing council was not interested in giving Berlusconi's government cover via continued bond buying. These hints were not enough, however, and Berlusconi continued efforts to cling to power, until finally his Northern League coalition allies abandoned him in a procedural vote on Tuesday. With fears that the entire government could collapse in a no-confidence vote at any time, yields on the Italian 10-year surged above 7%, prompting clearinghouses to hike margin requirements for Italian bonds, which squeezed yields even higher. Outright yields and spreads against the 10-year German Bund widened for the debt of all euro-zone member states. With the Italian yield spread blowing out, FX dealers reminisced about how long it took other peripheral euro zone states to beg for bailouts after yields on their 10-year notes rose above 7%: Portugal took 49 days, Ireland lasted 15 days, and Greece only held out for only 13 days. The response in the bond market sharpened Berlusconi's resolve, and he agreed to step down following parliament's passage of the government's 2012 budget, including austerity measures, which should be complete by Sunday. Former EU commissioner Mario Monti is the most likely candidate to lead a transitional Italian government.
- On Wednesday morning, before real panic had set in, EUR/USD was trading above 1.3850, but by late the same day the cross was below 1.3550 and on Thursday morning the cross dipped briefly below 1.3500. As the week drew to a close the euro was off its worst levels, after the Italian upper house approved the budget and austerity measures, Portugal's Parliament approved its 2012 draft budget and Greece officially appointed Papademos as the new prime minister and swore in a new cabinet. Italy managed to sell 12-month bills and Spain said that it would proceed with its planned auction next week despite extreme market conditions. And despite Mersch's comments, the ECB continued aggressive buying of peripheral bonds all week. Nevertheless, multiple ECB figures spoke out against calls for the ECB to staunch the crisis by undertaking even more aggressive bond buying or by setting itself up as the "lender of last resort" for various euro zone institutions, including banks. Dealers note that the ECB might discuss unsterilized primary and secondary bond purchases, an action is currently forbidden under the central bank charter, but might be excused if it helps to ensure an orderly market. In multiple statements, outgoing member Stark reiterated that the ECB is committed to its single mandate and that becoming a lender of last resort would sacrifice ECB independence.
- The Swiss National Bank (SNB) continued its rhetoric on the over-valuation of the Swiss currency as Oct Swiss CPI report re-enforced its concerns over deflation. The franc maintained a soft tone, and SNB member Jordan reiterated several times this week alone that the currency remained overvalued even with the current floor of 1.20 against euro. There have been persistent rumors that the SNB could shift that floor to anywhere from 1.25 to 1.35. The EUR/CHF cross ended the week just under the 1.24 level.
- The USD/JPY pair managed to move below the 78 handle with markets testing the BOJ resolve to weaken the JPY currency. The BoJ had not been directly involved in the pair since the Oct 31st massive intervention, but was reportedly using semi-official names to keep it close to 78.00. The pair continued to drift lower towards the lower portion of the 77 neighborhood.
- October economic metrics out of China served up a progress report for Beijing policymakers threading the needle of a soft landing. The most closely monitored CPI figure fell for the 3rd consecutive month and also matched its 6-month low at 5.5%, in line with consensus. Industrial production and trade data were bleak. The former came in at an 11-month low of 13.2%, offsetting last month's upside surprise. The latter saw the first rise in the overall terms of trade in three months at a $17B surplus, but also showed the slowest growth in exports since February, undoubtedly related to slower growth in Europe -- China's top export destination. Expectations of a policy easing response by the PBoC continued to percolate after the data, as China slashed the yield on its weekly 1-year bill auction to 3.5733% for the first time in nearly 3 months. China bank lending data marked a silver lining to the monthly reporting barrage, with October loans at a 4-month high of CNY587B above CNY500B consensus.
- Elsewhere in the Far East, Thailand flooding continued to inflict damage on the companies most exposed to the manufacturing hub. Reporting first-half results, Toyota was forced to withdraw its full-year outlook because of uncertainly related to supply disruptions. Japanese automakers, barely recovered from the March earthquake, continue to battle the perfect storm of persistently strong currency, slowdowns in their key export markets, and now more natural disasters. In South Korea, the central bank left rates unchanged at 3.25% for the 5th consecutive month but also scaled back its tightening bias, pointing to a longer than anticipated global turmoil.
