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.
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