Friday, November 18, 2011

Market Week Wrap-up

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

- Contagion from the European debt crisis spread to the core of the euro zone this week, driving steady declines on global equity markets. The cost for European banks to swap euros for dollars climbed to levels last seen in late 2008. Yields climbed ominously on the debt of semi-core and AAA-rated core euro zone member states France, Austria and even Finland. The yield on Italian 10-year debt spent part of the week above the key 7% level and the Spanish 10-year yield registered its first reading above 6% since the ECB renewed its SMP program in early August. In fact it was only repeated and substantial ECB bond purchases that forced Italian yields back below the key 7% level. Three-month LIBOR rose to its highest level in four months, while the spread between offer prices from European bond sellers and bids from buyers remained substantially wider. Investors had reason to worry about the EFSF after press reports suggested that the fund was only able to successfully sell a €3B, 10-year offering in support of Ireland last week by buying some of the debt itself. With markets questioning whether Europe has the tools it needs to save itself, attention has turned to the European Central Bank. ECB members forcefully resisted calls for the bank to adopt policies similar to those used by the Fed in 2008, insisting that the ECB would not become the lender of last resort. However, there were reports late in the week that European officials were discussing proposals for the ECB to lend funds to the IMF which could then lend them back to troubled euro zone states. Further exacerbating the sense of panic was a series of weak Q3 GDP reports, indicating that growth is rapidly decelerating. In the US, there were a few more decent economic numbers: the November Empire Manufacturing survey delivered its first positive reading since May of this year, while the October retail sales report was a bit better than expected. The weekly claims data "improved" noticeably, however analysts cite unemployed workers simply running out of benefits for the bulk of the declines. Regardless consternation is palpable that Europe's woes could eventually find their way to the other side of the pond keeping the lid on US Treasury yields. The benchmark 10-year finished the week at 2% while the long bond remains at 3%. For the week the DJIA fell 2.9%, the Nasdaq slipped 4%, and the S&P500 declined 3.8%.

- In energy markets, the inflated spread between Brent crude and WTI prices narrowed noticeably this week. The spread collapsed below $8.00 at one point on Thursday, a move of more than $10 in little over a week, although the spread widened out again later in the week as WTI prices fell back to where they entered the week. The catalyst was a decision by Enbridge, Inc to reverse the direction of crude oil flows in the Seaway pipeline, enable the transport of oil from Cushing, Oklahoma to the U.S. Gulf Coast. The pipeline switch should help drain the excess of crude oil inventories in and around Cushing that has held down WTI prices. Nonetheless, analysts are not expecting Brent and WTI return to parity any time soon. A surge in production from shale oil and Canada's tar sands means that, even after the reversal of the Seaway pipeline, there will still be a surplus of oil in Oklahoma.

- In the US, the rest of the retail complex reported quarterly results this week, with a brace of reports that featured few standout Q3 reports and a lot of stresses from the poor economic environment. Walmart missed profit targets by a hair in its Q3 and warned that margins would shrink in Q4, although comps improved over last quarter's showing. Target's results met expectations, but on the conference call executives warned that the consumer environment is poor and is likely to remain uneven. JC Penny disappointed investors with a pre-tax loss, contracting margins and negative same-store sales. Apparel name Abercrombie & Fitch widely missed profit expectations despite robust same-store sales. Among the better names, high-end retailer Saks beat expectations, as did Home Depot.

- The euro was once again on the defensive this week as officials struggled to contain the damage from debt crisis contagion in semi-core and core euro zone nations. Every day brought fresh rumors that the ECB was buying peripheral bonds (particularly Spanish and Italian paper). Some Italian banks were said to have asked the ECB to widen the type of collateral it would accept. EUR/USD began the week just shy of 1.3800, at its highs of the week, after the ECB's Weidmann stopped short of reiterating past Bundesbank opposition to the ECB's main interest rate falling below 1%. ECB member Stark stated that the bank still had room to maneuver on rates. EUR/USD approached a key one-month channel support line at 1.3410 and it held numerous attempts to test below the level. The technical price action for the euro saw headwinds particularly in the EUR/JPY pair at the 104.70 level. The inability for the cross to regain a foothold above the level could see it test parity. The USD/CHF pair tested one-month highs above 0.9220 while the EUR/CHF cross held above the 1.24 handle. Dealers believe it is only a matter of time before the SNB raised the floor in the EUR/CHF cross from the current 1.20 level.

- The USD/JPY declined to 76.53, the highest level for the yen since the Oct 31st solo intervention by the BOJ. USD/JPY pair continued to test below the 77 handle which prompted FX comments from the Japanese PM Noda about potential intervention. Dealers said that large Japanese fund Kokusai Re has been liquidating all of its Italian BTP bond holdings over past two weeks.

- The BoJ cut its assessment on the economy for the first time since April when Japan was hobbled by the mid-March earthquake. The BOJ noted that economic recovery is now working at a more moderate pace due to a slowdown overseas as well as the uncertainty over the full impact of Thailand floods. Earlier in the week, Japan Q3 preliminary GDP did show an impressive rise of 1.5% q/q - the highest rate of growth since 2003 - but that rate of growth had more to do with the debilitating impact of the March quake. In turn, risk aversion further boosted Japan currency toward ¥76.50 levels, the lowest USD/JPY rate since last month's solo intervention.

- In China, the PBoC lowered the yield on its one-year bill auction for the second consecutive week, triggering additional speculation that Beijing could make a move soon on monetary policy following a spate of declining inflation data. PBoC advisor Lee remarked that lower bill rates only reflect market speculation over easing and should not be taken as a signal for a move on rates. Property prices data in China's biggest cities remained frothy, as new home prices rose in 67 of 70 cities but existing home sales fell m/m in both Shanghai and Beijing. For the week, Shanghai Composite finished the week down 2.6% at 2,416, the lowest close in three weeks.