Friday, December 9, 2011

Market Week Wrap-up

Market Week Wrap-up

- Global equity markets were calmer this week after last week's wild moves, despite another uninspired EU summit, more worrying economic data in China and Europe, and a raft of concerning US corporate guidance calls. The focus was largely on the European Union leaders' summit on Thursday and Friday, as well as the ECB rate decision on Thursday morning. Coming into the week there were more unconfirmed reports of conflict between Berlin and Paris over potential policies to be promulgated at the summit, including whether the EU would agree to a new treaty or satisfy itself with an "intergovernmental agreement." A sense of mild optimism drove yields on both Italian and Spanish 10-year debt below 6% for the first time in weeks. On Monday evening, S&P put the sovereign ratings of all 17 euro zone nations -- including its six AAA-rated members -- on watch negative, warning that steps taken at the EU summit would determine the firm's ultimate ratings decisions. On Thursday, the ECB cut its main refi rates for a second month in a row and expanded its emergency lending measures, however it did not takes a step toward branding itself as the lender of last resort, as many had hoped. At the summit European leaders delivered on the hopes ginned up last week, which is to say the euro zone reached an incremental yet seemingly incomplete plan of action and agreed to meet again in three months to finalize the plan. Exhausted traders hardly had the energy to sell the news. Finnish PM Katainen summed up this week's deal nicely, noting that it was "beginning of the beginning of the end of the crisis." On the data front, rate decisions from Australia, New Zealand, and South Korea offered a unified theme of an entrenched regional slowdown, while monthly economic data from China showed further deceleration in both manufacturing and inflation metrics. In a worrying sign, the Shanghai Composite made fresh multi-month lows. Europe's In the US, the week's initial jobless claims hit nine-month lows and the preliminary University of Michigan consumer sentiment index moved out to its highest level since June. For the week the DJIA rose 1.4%, the NASDAQ gained 0.8%, and the S&P 500 tacked on 0.9%.

- With the fourth quarter reporting season fast approaching, firms have begun offering preliminary earnings guidance calls to position themselves in a darkening economic situation. Among the more negative calls, Metlife warned its Q4 profits would be lower than expected and gave a soft preliminary view of its FY12 outlook, Yum Brands' initial FY12 outlook fell short of expectations, and Darden Restaurants warned that its profits in the current quarter would disappoint. DuPont cut its FY11 outlook (slightly), citing destocking across polymers and certain industrial supply chains that has accelerated during the fourth quarter. Scotts Miracle-Gro warned that its quarterly loss in Q1 would be steeper than expected. Toyota cut its FY11 net and operating profit guidance in half due to the impact of the Thailand floods and the strong JPY. Not all the guidance was bearish: Fedex said that volume would reach 17M on Dec 12, +10% y/y, making for the busiest day in company history. Monsanto raised its Q1 guidance significantly, citing strength in Brazil and Argentina, with some contribution from the US and Australia. 3M's initial look at FY12 was largely in line with consensus expectations.

- The tech sector saw some negative calls for the current quarter as well. Chip manufacturer Texas Instruments and two close competitors, Lattice Semiconductor and Altera, downgraded their outlook for Q4. All three companies cited broad-based declines in orders across a wide range of markets. Texas Instruments indicated that demand for wireless chipsets is holding up, but on it also said distributors' inventories are at very low levels, which hints at a possible upswing in FY12. Bucking the industry trend, Novellus Systems reiterated its prior guidance and said its bookings in the current quarter were trending higher than prior projections, thanks to improved confidence among customers.

- Trading in FX markets was all a build up to Thursday's ECB decision and the EU leaders' summit. After the policy easing on Thursday, the ECB press conference began with the EUR/USD pair moving higher to test 1.3459 as the European Central Bank disclosed that it would implement a three-year refi operation (an extension beyond the existing one-year refi) and ease collateral rules. EUR/USD then fell to test 1.3310 after ECB President Draghi commented that the EU treaty did not permit monetary financing of governments, taking hopes for an ECB backstop off the table for the moment. Many were disappointed that the bank was only focused on ways to support the banking sector and refused to become the lender of last resort for euro zone states, although some analysts believe the bank is waiting for political leaders to draft a game plan for deeper economic integration before it agrees to a more involved role. Note that the EUR/USD pair again managed to hold above the pivotal 1.3210/30 area, even in the aftermath of the largely disappointing summit meeting.

- The EU leaders summit has unwound more or less as expected, with the 17 euro zone nations and at least six of the ten non-euro zone nations agreeing to deep fiscal integration via a new treaty rather than some sort of inter-governmental agreement (three nations said they must consult their Parliaments first and the UK refused to join the revised treaty). The UK stands isolated, refusing to play nice with its European colleagues, citing the competitive position of the UK's financial industry as its chief concern. EU leaders agreed to meet again in March of 2012 to finalize the new treaty. Among the disappointments was the lack of any discussion of euro bonds or agreement on a bank license for the ESM that would have drawn the ECB closer to a backstopping role. However, few doubt that the issue of euro bonds is likely to be brought up again at the March summit.

- In other FX news, the BOE left its key rate unchanged at 0.50% and maintained its asset purchase target at £275B. The yen was firmer against major pairs. Japanese Economy Minister Furukawa commented that the European crisis was to blame for the Yen strength and that he wants to make efforts with the BOJ to further clarify its FX stance internationally. The JPY was firmer on risk aversion flows against the major pairs ahead of the EU Leader Summit.

- Three central bank rate decisions in Asia did not inspire confidence. In Australia, the RBA cut its cash rate by 25bps for the second consecutive meeting, citing softer labor conditions, more pronounced weakness in China and inflation within the bank's target range of 2-3%. Australia's November labor data corroborated an increasingly cautious central bank stance, as net job creation turned negative for the first time in three months and participation rate fell to its lowest point in 15 months. In New Zealand, the RBNZ left rates unchanged at 2.50% but lowered its GDP target for this fiscal year to 2.0% from 2.5%. Governor Bollard's statement also dropped a hint of policy tightening in the coming month that has been present ever since the emergency post-quake rate cut in March. The Bank of Korea also cut its growth projections accompanying this week's unchanged policy stance, lowering its 2011 GDP target by 0.5pts to 3.8% and 2012 target to an even lower 3.7% mark amid continued uncertainty for Korea's key export markets.

- Monthly economic data from China showed further deceleration in both manufacturing and inflation metrics, giving rise to the rumors of last week's RRR rate cut by the PBoC being followed by a cut in key 1-year rates. November CPI fell well shy the expected 4.5% at 4.2%, the lowest rate since September of 2010, while industrial production came in at a 26-month low 12.4%. Financial press continued to home in on the risk of Chinese asset bubbles, discussing rising local government debt, suspended infrastructure projects and outflows of speculative capital. Indeed, China monthly FX reserves were said to have fallen for the first time in eight years, the Shanghai Composite made fresh multi-month lows below 2,310, and Vale became the first mining giant to accept a double-digit price cut on iron ore imports.