Market Week Wrap-up
- European debt contagion got further out of hand this week, as investors
liquidated assets, took refuge in dollars and USTs and markets sank lower.
Coming into the week, a chorus of voices were sounding the alarm about the
impact of the European crisis, further inflaming sentiment: Moody's warned that
higher borrowing costs would be credit negative for France, Germany's BdB
Banking Association warned that German local governments are already having
trouble financing themselves and Goldman Sachs cautioned that sovereign risk is
"spreading like wildfire." In the US, the Congressional
supercommittee tasked with developing deep, structural reforms to the budget
failed to come to an agreement. The result was expected, although it further
damaged confidence. JP Morgan came out a cut their outlook on commodities to
underweight and noted policy failures in the US and Europe have darkened the
six-month outlook. With the EFSF bailout fund clearly faltering, markets were
also reacting to the sense that officials do not have the proper tools to halt
contagion. Indeed, German party officials warned that Germany did not have a
'bazooka' plan to deal with the crisis. The IMF proposed new liquidity lines,
up to 24 months in scope, allowing nations to borrow against a multiple of
their IMF quota to finance balance of payment needs, however analysts panned it
as too little, too late. The European Commission floated several preliminary
ideas for creating a euro bond system, although Germany, Finland and the
Netherland's continue to categorically rule out euro bonds. The situation took
a marked turn for the worse after a very disappointing German 10-year bund
auction on Wednesday morning; in the auction,the Bundesbank was forced to buy
39% of the €6B on offer, leaving the sale "technically uncovered."
Global growth fears were further exacerbated by a sub-50 reading in the
November HSBS flash PMI reading for China and the revision lower in the second
reading of US Q3 GDP. US Treasury prices were bid throughout the week from safe
haven flows, though gains were modest spreads between US and European interest
rates widened. The US 10-year yield remains below 2% and for the first time in
more than 2-years the German Bund's yield exceeds that of the US Treasury's by
more than 30 basis points. For the week the Dow was off 4.8%, the NASDAQ
declined 5% and the S&P 500 lost 4.7%. This was the worst performance by
the leading US indices during the Thanksgiving week since the market began
observing the holiday in 1942.
- In US equity news, there were two notable mergers announced this week.
Biotech firm Pharmasset agreed to be acquired by Gilead Sciences for $137/shr
in cash, an 89% premium to the firm's prior closing price. The transaction is
valued at $11B. Pharmasset is conducting clinical trials on promising hepatitis
C medicines. Property and casualty insurer Alleghany signed a definitive deal
to acquire reinsurer Transatlantic Holdings for $3.4B in cash and stock, for an
implied deal value of $59.79/shr. This new offer values Transatlantic at nearly
$5 more per share than Validus' latest offer, which may help Transatlantic
prevent Validus' hostile takeover. In earnings news, investors were not
enthusiastic about Hewlett-Packard's Q4 results. HP only just met expectations
in the quarter, while its earnings forecast for Q1 and FY12 was strikingly
weak, and the firm refrained from offering revenue guidance. Deere was a rare
bright spot: the company firmly beat earnings and revenue targets in its Q4
report and offered a very bullish forecast for 2012, including very strong
double-digit revenue gains for both the year and the first quarter.
- The triple whammy of the European debt crisis, US budget policy gridlock and
global growth fears drove FX trading this week. Risk-off sentiment eventually
benefitted the greenback and the yen, although the euro held up to a certain
degree on Monday and Tuesday as markets watched the US Congressional
supercommittee go down in flames. In the early part of the week the EUR/USD
maintained a hold above 1.3450, despite the evident contagion and a very poor
Spanish 3- and 6-month bill auction featuring yields at 14-year highs, well
above 5%. The failed German 10-year bund auction on Wednesday sent EUR/USD
definitively below the pivotal 1.3370 channel-line support area. Note that on
Tuesday, CLS Bank International, the backbone of the FX trading settlement
system, said it was evaluating various contingency scenarios in which the euro
zone breaks up.
- As the week drew to a close a combination of risk aversion and ECB comments
sent the Euro to fresh 7-week lows against the USD and JPY pairs. The rating
agencies continue to be active with sovereign downgrades with Portugal and
Hungary cut to junk status by Fitch and Moody's while S&P cut Belgium's
rating as well in the last 24 hours. The Franc0-German-Italian press conference
failed to inspire any initial compromise by Germany on the issuance of joint
euro bonds to help stem the debt crisis in Europe. Chancellor Merkel stuck to
her guns in her opposition of such bonds.
- Kokusai Asset Management was said to have sold entire holdings of Spanish and
Belgian government bonds in flagship fund. EUR/JPY cross hit six-week lows as
its tested below 103.20. The big upswing in USD/JPY on Tuesday was said to have
been due to some decent Japanese exporter interest at the 77.30 area, although
the pair drifted back below 77.00 eventually. The pair nearly broke 77.60 on
Wednesday after the failed German auction, and ended the week near that level
after reports circulated that the BoJ said that have sent survey to major banks
regarding fx intervention assistance. Also of note commentary out of the
S&P expressed real concern regarding Tokyo's ability to make progress on
lowering its debt levels weighed on the Yen, sending USD/JPY above ¥77.50. JGB
yields have also risen, with 10-year at a 3-week high above 1%. Concurrently,
constraints from the Thailand flood and recent strenth in the Yen saw Japanese
economy slip back into deflation, as y/y core CPI fell into contraction for the
first time in 4 months. Cabinet officials remained cautious yet defiant, with
Dep BOJ Gov Yamaguchi stating financial market condition are still severe, but
also attributing Yen strength to safety.
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